Ecosystem Competition and Cross-Market Subsidization: A Dynamic Theory of Platform Pricing

Platform giants in China have operated with persistently compressed margins in highly concentrated markets for much of the past decade, despite market shares exceeding 60% in core segments. Standard theory predicts otherwise: either the weaker firm exits, or survivors raise prices to monopoly levels. We argue the puzzle dissolves once firms are viewed as ecosystem optimizers rather than single-market profit maximizers. We develop a dynamic game in which a firm’s willingness to subsidize depends on the spillover value its users generate in adjacent markets – what we call \textit{ecosystem complementarity}. When this complementarity is strong enough, perpetual below-cost pricing emerges as the unique stable equilibrium. The result is not predation in the classical sense; there is no recoupment phase. It is a permanent state of subsidized competition, rational for each firm individually but potentially inefficient in aggregate. We characterize the equilibrium, establish its dynamic stability, and show that welfare losses compound over time as capital flows into subsidy wars rather than innovation. The model’s predictions are consistent with observed patterns in Chinese platform markets and suggest that effective antitrust intervention should target cross-market capital flows rather than prices.

💡 Research Summary

The paper tackles a striking empirical puzzle: Chinese platform giants such as Meituan, Alibaba’s Ele.me, and more recently JD.com have maintained extremely low profit margins despite commanding well‑above‑60 % market shares in highly concentrated primary markets (e.g., food delivery). Traditional industrial‑organization theory predicts that either the weaker firm exits or surviving firms raise prices to monopoly levels. The authors resolve this paradox by reframing platforms not as single‑market profit maximizers but as ecosystem optimizers that value the spill‑over benefits their users generate in adjacent markets (fintech, advertising, cloud services, etc.).

Core Concept – Ecosystem Complementarity

The central modeling device is the Ecosystem Complementarity function Ψ(·), which maps a firm’s primary‑market share q to the present‑discounted value of spill‑overs to other businesses. Ψ is built from three channels: (i) data externalities, (ii) traffic diversion to higher‑margin services, and (iii) network reinforcement across the firm’s portfolio. Crucially, the authors assume local convexity of Ψ in an intermediate share interval (