We study the impact of increasing online intermediation in legacy industries. We develop a duopoly model where an intermediary platform enables firms to attract consumers from competitors in exchange for a fee. We show that the platform can induce firms to join, even when they cannot expect benefits from joining. When both firms join, they pass down the platform fee to consumers. As the popularity of the platform rises among consumers, it can raise its fee to extract a growing proportion of the benefits it creates. We test the predictions of our model by analyzing the adoption of OpenTable by restaurants in New York City. We show that after the platform becomes prevalent, restaurants that use it raise their prices by an amount equivalent to the fees charged by the platform. In contrast, we observe almost no effect of adoption on propensity to exit – a proxy for restaurants’ profitability.
See below for working paper and video of presentation at the StartML Workshop @ NeurIPS’21