A Price Theory of Multi-Sided Platforms
A Price Theory of Multi-Sided Platforms
By E. G LEN W EYL∗
Draft: October 6, 2009
I develop a general theory of monopoly pricing of networks. Platforms use insulating tariffs to avoid coordination failure, implementing any desired allocation. Profit-maximization distorts in the spirit of Spence (1975) by internalizing only network externalities to marginal users. Thus the empirical and prescriptive content of the popular Rochet and Tirole (2006) model of two-sided markets turns on the nature of user heterogeneity. I propose a more plausible, yet equally tractable, model of heterogeneity in which users differ in their income or scale. My approach provides a general measure of market power and helps predict the effects of price regulation and mergers.
JEL:
Keywords:
The pricing problems of payment and advertising platforms have much in common. Both seek to attract two distinct groups of users: AmEx needs cardholders and merchants while the New
York Times recruits readers and advertisers. Because the value each group takes from using these services depends on the size of the other side of the market, the platform’s pricing and marketing strategies to each group are closely linked. Therefore policy directed at alleviating distortions caused by market power in these industries must take account of how interventions on one side affect welfare and platform behavior on the other.
∗ Harvard Society of Fellows and Toulouse School of Economics: 78 Mount Auburn Street, Cambridge, MA 02138, weyl@fas.harvard.edu. This paper was split off as one part of a previous working paper “Monopolies in Two-Sided
Markets: Comparative Statics and Identification”. I am grateful to el Ministerio de Hacienda de Chile and the Centro de Investigaci´ n Econ´ mica at the Instituto Tecnol´ gico Aut´ nomo de M´ xico (CIE-ITAM) which hosted me on a visit o o o o e while I conducted parts of this research. The Harvard Milton Fund supported the last stage of this project
By E. G LEN W EYL∗
Draft: October 6, 2009
I develop a general theory of monopoly pricing of networks. Platforms use insulating tariffs to avoid coordination failure, implementing any desired allocation. Profit-maximization distorts in the spirit of Spence (1975) by internalizing only network externalities to marginal users. Thus the empirical and prescriptive content of the popular Rochet and Tirole (2006) model of two-sided markets turns on the nature of user heterogeneity. I propose a more plausible, yet equally tractable, model of heterogeneity in which users differ in their income or scale. My approach provides a general measure of market power and helps predict the effects of price regulation and mergers.
JEL:
Keywords:
The pricing problems of payment and advertising platforms have much in common. Both seek to attract two distinct groups of users: AmEx needs cardholders and merchants while the New
York Times recruits readers and advertisers. Because the value each group takes from using these services depends on the size of the other side of the market, the platform’s pricing and marketing strategies to each group are closely linked. Therefore policy directed at alleviating distortions caused by market power in these industries must take account of how interventions on one side affect welfare and platform behavior on the other.
∗ Harvard Society of Fellows and Toulouse School of Economics: 78 Mount Auburn Street, Cambridge, MA 02138, weyl@fas.harvard.edu. This paper was split off as one part of a previous working paper “Monopolies in Two-Sided
Markets: Comparative Statics and Identification”. I am grateful to el Ministerio de Hacienda de Chile and the Centro de Investigaci´ n Econ´ mica at the Instituto Tecnol´ gico Aut´ nomo de M´ xico (CIE-ITAM) which hosted me on a visit o o o o e while I conducted parts of this research. The Harvard Milton Fund supported the last stage of this project
References: Ambrus, Atilla, and Rossella Argenziano. 2009. “Asymmetric Networks in Two-Sided Markets.” American Economic Journal: Microeconomics, 1(1): 17–52. Anderson, Simon P., and Stephen Coate. 2005. “Market Provision of Broadcasting: A Welfare Analysis.” Review of Economic Studies, 72(4): 947–972. Armstrong, Mark. 2006. “Competition in Two-Sided Markets.” RAND Journal of Economics, 37(3): 668–691. Athey, Susan, and Glenn Ellison. 2008. “Position Auctions and Consumer Search.” http://econwww.mit.edu/files/2879. Baron, David P., and Roger B. Myerson. 1982. “Regulating a Monopolist with Unknown Costs.” Econometrica, 50(4): 911–930. Becker, Gary S., and Kevin M. Murphy. 1993. “A Simple Theory of Advertising as a Good or Bad.” Quarterly Journal of Economics, 108(4): 941–964. Berry, Steven T., and Joel Waldfogel. 1999. “Free Entry and Social Inefficiency in Radio Broadcasting.” RAND Journal of Economics, 30(3): 397–420. Besanko, David, Shabtai Donnenfeld, and Lawrence J. White. 1987. “Monopoly and Quality Distortion: Effects and Remedies.” Quarterly Journal of Economics, 102(4): 743–768. Bolton, Patrick, Joseph F. Brodley, and Michael H. Riordan. 1999. “Predatory Pricing: Strategic Theory and Legal Policy.” Georgetown Law Journal, 88(8): 2239–2330. Bresnahan, Timothy F. 1982. “The Oligopoly Solution Concept is Identified.” Economics Letters, 10(1-2): 87–92. Caillaud, Bernard, and Bruno Jullien. 2001. “Competing Cybermediaries.” European Economic Review, 45(4–6): 797–808. Caillaud, Bernard, and Bruno Jullien. 2003. “Chicken & Egg: Competition Among Intermediation Service Providers.” RAND Journal of Economics, 34(2): 309–328. Choi, Jay Pil, and Byung-Cheol Kim. 2008. “Net Nuetrality and Investment Incentives.” http://papers.ssrn.com/sol3/papers.cfm?abstract id=1264934. Church, Jeffrey, and Neil Gandal. 1992. “Network Effects, Software Provision, and Standardization.” Journal of Industrial Economics, 40(1): 85–103. Damiano, Ettore, and Hao Li. 2008. “Competing Matchmaking.” Journal of the European Economic Association, 6(4): 789–818. Dybvig, Phillip H., and Chester S. Spatt. 1983. “Adoption Externalities as Public Goods.” Journal of Public Economics, 20(2): 231–247. Easterbrook, Frank H. 1981. “Preadatory Strategies and Counterstrategies.” University of Chicago Law Review, 48(2): 263–337. Economides, Nicholas. 1996. “The Economics of Networks.” International Journal of Industrial Organization, 14(6): 673–699. Edlin, Aaron S. 2002. “Stopping Above-Cost Predatory Pricing.” Yale Law Journal, 111(4): 941–991. Ellison, Glenn, and Drew Fudenberg. 2003. “Knife-Edge or Plateau: When do Market Models Tip?” Quarterly Journal of Economics, 118(4): 1249–1278. Ellison, Glenn, Drew Fudenberg, and Markus M¨ bius. 2004. “Competing Auctions.” Journal o Evans, David S. 2003. “The Antitrust Economics of Two-Sided Markets.” Yale Journal of Regulation, 20(2): 325–381. Fan, Ying. 2008. “Market Structure and Product Quality in US Daily Newspaper Market.” http://pantheon.yale.edu/∼yf34/research.htm.