Competition, Market Coverage, and Quality Choice in Interconnected Platforms

Abstract

We study duopoly competition between two interconnected Internet Service Providers (ISP) that compete in quality and prices for both Content Providers (CP) and consumers. We develop a game theoretic model using a two-sided market framework, where ISP's are modeled as interconnected platforms with quality bottlenecks; a consumer on a low quality network accessing content on a high quality platform experiences low quality. Platforms first pick quality levels from a bounded interval and in the subsequent stages compete in prices for both CP's and consumers. CP's are heterogenous in content quality which is uniformly distributed between [gamma[over-bar]-1, gamma[over-bar]]. We first establish the existence of a price subgame perfect equilibrium (SPE) given any asymmetric pair of platform quality choices. We show that the higher the asymmetry the more likely the CP market is to be uncovered if the average content quality (represented by gamma[over-bar]) is low. In contrast, if gamma[over-bar] is high then the market is always covered. We then show that a SPE for the whole game exists and characterize all the equilibrium choices of the quality game. In particular, we show that the equilibria involve either maximal differentiation or partial differentiation depending on gamma[over-bar] Moreover, we characterize the resulting market configurations in the final stage and show that they depend on gamma[over-bar] and the asymmetry between platforms represented by the ratio of the qualities, I.