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Volume 27, Issue 4, Winter 2018
With a focus on the lodging market, we investigate the nature of competition between a peer‐to‐peer platform and a traditional lodging provider (hotel), in an environment where both possess the market power to affect the final lodging price established in the market. To understand such an environment, we investigate the strategy choices of the three types of players active in this market: the platform, the hotel, and individuals in the population who consider supplying or demanding lodging capacity. We use our analysis to predict how the emergence of the peer‐to‐peer platform affects the profits of the hotel and the welfare of consumers. We characterize two types of equilibria: Partial Coverage and Full Coverage. The former type arises if each individual’s demand for lodging while on vacation is relatively low in comparison to her supply. In this case, the level of demand originating from vacationers is insufficient to make it worthwhile for the platform to lower its service fee in order to attract capacity from every individual in the population. In contrast, when the demand for lodging while on vacation is relatively high, it may become profitable for the platform to implement the Full Coverage equilibrium, in which case every individual supplies lodging capacity to the platform. We demonstrate that the entry of the platform to the market will definitely increase the consumer surplus if the platform chooses to implement the Full Coverage equilibrium. At the Partial Coverage equilibrium, the consumer surplus might actually decline upon the entry of the platform. This might happen because the entry of the platform can sometimes lead to higher lodging prices, and as a result, can hurt individuals when vacationing. Because the entry of the platform raises the income of individuals in the economy, their willingness to pay for lodging while on vacation may rise. Such higher prices may also sometimes lead to higher profits for the hotel, in spite of the competition with the platform. In the special case that individuals experience no disutility when offering a portion of their housing space to the platform because this space has no alternative use for the individual, the entry of the platform will always lead to higher consumer welfare and lower profits for the hotel, irrespective of whether Full or Partial Coverage arises as equilibrium.