Platform Money

Abstract

Do private profit motives inevitably lead to the infinite overissuance of currency? We show that a two-sided platform's core matching business endogenously disciplines its monetary policy. Overissuing currency destroys trade surplus, which in equilibrium, unravels the cross-group network externalities required to extract seller fees. The platform optimally sets an inflation markup over the Friedman rule, utilizing its franchise value as an endogenous commitment device. Furthermore, platform money improves social welfare when the issuer possesses superior matching technology. Finally, while accepting outside money maximizes market share, rejecting it enables strategic segmentation. By ceding captive buyers to the legacy market, the platform prompts its competitor to raise fees, allowing it to safely extract higher seigniorage from remaining flexible users