Welfare Implications in Intermediary Networks

Competitive pressures have forced many traditional companies to evolve into a platform-based business model. Trade commissions and even supreme courts recognize the need for economic analysis as the nature of competition changes in the market. There have been many mergers and acquisitions across platform-based businesses. In the ride-sharing sector, Lyft and Didi Chuxing were initially in a partnership to thwart Uber but Uber merged its operation with Didi Chuxing eventually. Amazon and Walmart competed fiercely to buy the Indian online retailer Flipkart, which Walmart eventually won. Traditional antitrust models studying the implications of mergers do not consider the underlying network structure of these intermediary markets. This is the main focus of our model and analysis. We provide a network measurement to evaluate the effect of mergers on welfare. Our analysis shows that because of the underlying networks mergers can sometimes improve welfare.

We study the welfare implications of competing middlemen in a two-sided market, where goods are intermediated between providers and purchasers. In our model, each intermediary sets the quantities it intermediates, and the prices are a consequence of a Cournot competition. Our analysis shows that, unlike traditional markets, increasing competition is not always beneficial for market efficiency and that mergers can have an ambiguous effect on efficiency. We also analyze how the underlying network influences social welfare. We define a parameter called the intermediary capacity of the network and show how the price of anarchy depends on this parameter. These results suggest an intuitive and simple measure for the level of competitiveness in a networked market involving intermediaries.