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The economics of platforms in a Walrasian framework

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Abstract

We present a tractable model of platform competition in a general equilibrium setting. We endogenize the size, number, and type of each platform, while allowing for different user types in utility and impact on platform costs. The model is applicable to the recent growth in digital currency platforms. The economy is Pareto efficient because platforms internalize the network effects of adding more or different types of users by offering type-specific contracts that state both the number and composition of platform users. Using the Walrasian equilibrium concept, the sum of type-specific fees paid cover platform costs. Given the Pareto efficiency of our environment, we argue against the presumption that platforms with externalities need be regulated.

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Authors and Affiliations

  1. Federal Reserve Board of Governors, Washington, DC, USA

    Anil K. Jain

  2. Department of Economics, Massachusetts Institute of Technology, Cambridge, MA, USA

    Robert M. Townsend

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  1. Anil K. Jain
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  2. Robert M. Townsend
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Correspondence to Robert M. Townsend.

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We would like to thank the anonymous reviewer and the editor for their careful reading of our manuscript and their suggestions. We would also like to thank Glen Weyl, Marc Rysman, and seminar participants at the the Bank for International Settlements, Boston Federal Reserve, the International Industrial Organization Conference, and Princeton University for helpful comments. Anil Jain is grateful for financial support from the Consortium on Financial Systems and Poverty (CFSP). Robert Townsend is grateful for financial support from the Centre for Economic Policy Research (CEPR) and the Department for International Development (DFID) (MRG002_1255), the Eunice Kennedy Shriver National Institute of Child Health and Human Development (NICHD) (R01 HD027638), and the Consortium on Financial Systems and Poverty at the University of Chicago, funded by Bill & Melinda Gates Foundation (51935). Townsend consults with the Federal Reserve Banks of New York and Boston. The findings and conclusions in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System, the views of any other person associated with the Federal Reserve System or the views of the funders. All mistakes are our own.

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Jain, A.K., Townsend, R.M. The economics of platforms in a Walrasian framework. Econ Theory 71, 877–924 (2021). https://doi.org/10.1007/s00199-020-01309-6

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