Tipping in Two Sided Software Markets: An Investigation of Asymmetric Cost Differences

This paper models a two-sided market with two horizontally-differentiated platforms that conduct a game in prices. Platforms set only membership fees to both buyers and sellers. The game is single-stage as platforms choose prices and agents simultaneously choose which platform to join. Given the equilibrium prices to each side, the paper investigates the effects of inter-platform cost asymmetries. It finds that the magnitude of the effects of inter-platform cost differences on equilibrium membership depends on whether the asymmetric costs are borne by the platform or by developers on the platform. Under regimes with high network effects, differences in the platforms’ costs of acquiring and serving customers have only limited impact, while the impact of cost differences for component production are less clear.