NESTING VERTICAL AND HORIZONTAL DIFFERENTIATION IN TWO‐SIDED MARKETS

Abstract

ABSTRACT We merge the two‐sided markets duopoly model of Armstrong (2006) with the nested vertical and horizontal differentiation model of Gabszewicz and Wauthy (2012), which consists of a linear city with different consumer densities on the left and on the right side of the city. In equilibrium, the high‐quality platform sells at a higher price and captures a greater market share than the low‐quality platform, despite the indifferent consumer being closer to the high‐quality platform. The difference between market shares is lower than socially optimal. A perturbation that introduces a negligible difference between the consumer density on the left and on the right side of the city may disrupt existence of equilibrium in the model of Armstrong (2006).