“Platform Holdup” and Platform Regulation

Abstract

The interaction between a platform and its users plays a crucial role in shaping its pricing strategy and overall success. When users incur an initial cost to join the platform and stand to gain utility, the risk of receiving minimal benefits due to aggressive pricing arises. This discourages user participation, leading to launch failures for potential platforms and significant welfare loss in equilibrium, identified as the “platform holdup” issue. Addressing the platform holdup problem can be achieved, in part, by introducing an implicit guarantee through government oversight, providing subsidies to potential users, and granting users dividend rights. The analysis of oligopoly cases shows that, in most instances, market competition alone is not sufficient to fully resolve the problem.