Platform Competition, Vertical Differentiation and Price Coherence

This paper analyzes downstream merchant price coherence when upstream platforms are vertically differentiated. When merchants are unable to charge different prices to consumers who purchase their product using different platforms, fee competition among platforms becomes more intense. We show that with price dispersion, platforms compete for market share while, with price coherence, they compete for the market. As a consequence, price coherence can increase consumer surplus and total welfare when the quality difference and its cost are intermediate. We also compare private and social incentives of a high-quality platform and a merchant to impose price coherence and we explore the effects of price dispersion on investment incentives.