The Platform Economy and Natural Monopoly: regulating or laissez-faire?

The platform economy has been a hot issue all over the world, especially in china. The Chinese capital market has witnessed substantial cases of mergers and acquisitions among those platforms recent years. Three IT industry giants in China,BAT(Baidu,Alibaba,Tecent), are all developing towards gigantic system of various platforms through purchasing related small platforms or investing in some new platforms. It seems that the platform economy has been on its way to monopoly. When it comes to monopoly, people tend to connect it with social welfare distortion and call for government regulation. The consequence of social welfare being worse off is obvious in our ample previous researches on some traditional markets--one-sided markets. But platform economy is a two-sided market essentially, so whether monopoly will hurt social welfare and whether the government should regulate deserve further discussion. We have defined a platform economy today in China as a system between firm and market which provides a platform for transactions between users ( such as buyer and sellers) in both sides. It maximizes its profits by connecting users in both sides directly(such as buyers and sellers) to implement transactions. According to Tirole and Rochet’s(2003) definition ,the platform economy is a two-sided markets essentially because not only price level but also price structure between two sides can create different revenues in such platform. Furthermore, a platform economy is operated based on the Internet, whose key characteristics are (1) making the marginal cost of the platform operation converge to 0; and (2) most information concerning on the business being nonexclusive and being shared by all,which causes network externalities? . In a competitive market, the platform will set prices equal to the marginal cost,0(P=MC=0). Unable to charge neither side users, the platform will operate suffering loss for some periods. Despite of the loss, the platform still has incentives to maintain its business, because surviving in the last means a large market power. Once there is a few other platforms except itself in the market, it can set price level much higher than the marginal cost and gain a positive profit to cover its loss in earlier periods. In an extreme case where there is only one platform left in the market, the platform can set a monopoly price(P=ATC>MC=MR) which means substantial profits. Just like some other similar industries, the important features of zero marginal cost will push the market develop in the direction of natural monopoly. In terms of social welfare, once the market is not competitive any longer, the question of whether social welfare will decline is more ambiguous. Firstly, enormous users in both sides of a monopoly platform will generate tremendous positive network externalities to each other according to twosided market theory. Furthermore, there will be economies of scales in a monopoly platform, which means that it will face a decreasing marginal cost of operation. Both increase in benefits from platform and decrease in operation cost will improve social welfare to some extent. However, on the other hand,a monopoly price the platform charges will definitely result in some transaction distortion. Too high prices will push some people quit platforms and thus they can not enjoy the benefits any more, which means that some users will be worse off and social welfare will decrease. Whether the social welfare will improve depends on which effects will dominate and our discussion will get involved in many factors such as users’ elasticities or some other factors on demand side. We will analyze the issue based on two-sided market framework developed by Tirole and Rochet(2003,2006). Moreover, we will analyze it risk features. Even if the social welfare has been improved, the social well-being could never be only measured by a single social welfare function, the social planner, government should take more factors into consideration. When all people or all users are connected with each other through a few platforms or a single platform, the possibility of systematic risks will increase. Once some section goes wrong, fear can be transmitted among individuals and institutes quickly through the networks before the system fix it. The existence of network externality in the platform economy can benefit users when everything functions normal, but it will be a disaster to the system when something goes wrong, because the close connection of all users will magnify a mistake to an extreme level. The enlarged systematic risks without doubt will threaten the financial safety in any economy. Last but not the least,discussion on rights of using public information assets is necessary when the platform is surrounded by the Internet system, then government shall know when and how to supervise the network monopoly to ensure all information be made use of in proper ways .