Quasi-Collusive Equilibria in Two-Sided Hotelling Models

Abstract

Abstract The Hotelling model is widely used to analyze platform competition in two-sided markets. Under standard assumptions, namely, sufficiently high stand-alone utility and strong product differentiation relative to cross-group externalities, the model yields a competitive equilibrium with two active platforms. Relaxing either assumption typically leads to corner outcomes such as market tipping or uncovered markets. This paper shows that, when the full parameter space is analyzed, an additional class of equilibria emerges: market-sharing kinked-demand equilibria (Mérel and Sexton, 2010), at which platforms soften competition and replicate a collusive outcome. These findings extend the traditional two-sided Hotelling framework by highlighting market environments, common in digital settings, in which cross-group externalities outweigh both differentiation and stand-alone utility.