A Dynamic Contest Model of Platform Competition in Two-Sided Markets

In this article, we analyze the dynamic competition between two platform firms (A&B) in two-sided markets with network externalities. In Period 1, platform A or B wins the contest in a first stage and can serve the two-sided market monopolistically in a second stage. In Period 2, the two platforms carry over previous investments to a subsequent contest in a first stage, and the winner (A or B) serves the market monopolistically in a second stage. We show that a head start of one platform does not guarantee future success. The combination of cost advantages and network externalities affects the platforms' success. Moreover, a market dominance of a platform does not necessarily result in higher profits