When competition may decrease welfare : A model of social media platforms competing in advertising intensity

Absztrakt (kivonat)

This paper presents a model of social media platforms with a novel approach. Unlike in previous models where platforms maximised their profits by choosing prices for the two sides, here their only decision variable is their advertising intensity. The equilibrium in this model is reached in a sequential game between three types of agents: platforms, advertisers, and users. We consider two different specifications. In the first case, there is only one monopolist platform, while in the second case there are two platforms forming a competitive duopoly (where users single-home and advertisers multi-home). Our main research question is how competition between platforms affects the aggregate welfare in the economy. To answer this question, we derive the subgame perfect Nash equilibria for both cases and compare the two results. We find that there is no clear relation between the monopoly welfare and the competitive welfare. Which one is bigger depends on the values of the model's parameters. Therefore, the classical notion that competition is always better than a monopoly does not necessarily hold for social media platforms. This is a very interesting result, which is especially relevant in recent discussions about how to regulate social networks. Since the socially optimal solution varies from market to market, a social planner must be very careful and collect all available information about the market it wants to regulate.