The Economics of Digital Platforms: A Guide for Regulators

Abstract

This paper examines the economics of digital platforms and two-sided markets and discusses the economic conditions that underlie policy assertions by advocates of both interventionist and laissez-faire policies. We include applications to internet search, online advertising, media, data, and privacy. Our goal is to provide a balanced look at the economic assumptions that underlie the many “possibility theorems” policymakers use to rationalize different policies (e.g., regulation, breaking up large companies, subsidizing entry, forced data sharing, or maintaining the status quo). Our discussion of the economics underlying various possibility theorems highlights the type of information and analyses required to determine whether alternative forms of intervention are likely to enhance the welfare of various market participants. While it is relatively easy to identify theoretical conditions under which intervention dominates the status quo (and vice versa), empirical verification is difficult because multi-sided platforms have many interrelated parts and involve complex data. These complexities augment the challenges inherent in implementing welfare-enhancing policies and highlight the importance of evidence-based decision-making.