Feb 29, 2020 in two sided markets, users gain benefits from interacting with a separate, complementary class of users e. Penetration pricing, such as when an intermediary lowers price early in the product life cycle and raises it after having established a base, is a natural outcome in twosided markets. And sort of ordinary competition markets and onesided markets. Getting the two sides on board is a useful characterization, but it is not restrictive enough. Supreme court issues landmark decision on twosided. This paper studies the incentives to engage in exclusionary pricing in the context of twosided markets. Given that twosided markets involve two different sets of customers, a question arises as to how to treat the two sides when defining the relevant product market. Or to put it differently, there is the question of whether the two sided should be analyzed jointly or separately. Antitrust two sided markets typically have network effects and as such are likely to tip toward a single dominant platform. A two sided market i a market where firms act as platforms and sell two different products to two different groups of. How these two phases of decisionmaking play out can be a key determinant of bargaining power and thus how price is shared between the two sides of the market.
What does the theory of twosided markets tell us about competition in the interbank and card payment systems. Firms operating in twosided markets are more aptly called. And then the value to them is simply two times the number of blue customers. In a number of markets, a fraction of end users on one or the two sides connect to several platforms. The classic example is provided by credit card services. In particular, we show that the wellknown definition given by evans is a. Products and services that bring together groups of users in twosided networks are platforms. Firstparty content, commitment and coordination in twosided markets andrei hagiu. Abstract this paper investigates pricing decisions and network choices in twosided markets with network externalities. For instance, the independent yellow pages publisher yellow. A two sided market is a platform that provides benefits to two distinct groups. Disentangling positive and negative externalities on two sided markets.
The term is often applied to a product, service or platform that has benefits for both firms and their customers. We provide a roadmap to the burgeoning literature on two. Pdf disentangling positive and negative externalities on. Hmos link patients to a web of health care providers, and vice versa. Given that two sided markets involve two different sets of customers, a question arises as to how. The recognition that many markets are multisided leads to new and inter. Overview theory of twosided markets platforms platform examples strategic challenges free platforms 3. See also evans2012 and filistrucchi, geradin, van damme and affeldt 2012 for a discussion of market definition in twosided markets.
Estimating platform market power in twosided markets with. Exclusive provision and program quality anna dannunzio y this version. Exchangetraded funds and securities lending abstract asset management has long been a simple, feeforservice business. However, as rochet and tirole 2006 illustrate, there is more to the literature than the study of. On monday june 25, the supreme court by a 54 decision in ohio v. A twosided market is a platform that provides benefits to two distinct groups. As they argue, if twosided markets only exist in situations where coasian transactions or bargaining between both sides of a platform is impossible, then parameters that are not readily observable play a critical role in identifying a twosided market a platforms governance structure, contractual arrangements and legal rules will. In the case of a video game system, for instance playstation, the intermediary is the console producer sony while the two sets of agents are. In twosided markets, two or more parties interact on a platform, and the interaction is affected by special indirect network externalities. Suppose that an academic downloads a pdf fi le of another academics paper. The list would also include newspapers, hmos, and computer operating systemsall of which serve what economists call twosided markets, or.
A twosided market occurs when two user groups or agents interact through an intermediary or platform to the benefit of both. In twosided markets, users gain benefits from interacting with a separate, complementary class of users e. Estimating platform market power in twosided markets with an. Song 2011 extends their model two twosided markets with a two indirect network effects. Twosided markets raise questions for dynamic pricing as well. A twosided market i a market where firms act as platforms and sell two different products to two different groups of buyers taking into account that demand from one group of buyers depends on demand from the other. The purpose of this paper is to start lling this gap. Indeed, parker and van alstynes 2005 seminal paper was titled twosided network effects.
Broadly speaking, a two sided market is one in which 1 two sets of agents interact through an intermediary or platform, and 2 the decisions o. Some new questions raised by twosided markets are more speci. The most important innovation in financial services since world war ii is almost certainly the credit card, which links consumers and merchants. However, none of these studies consider changes in speci c account terms and fees in response to interchange fee declines. Published in volume 23, issue 3, pages 12543 of journal of economic perspectives, summer 2009, abstract. Firstparty content, commitment and coordination in two. Pdf the economics of twosided markets semantic scholar. Strategies for twosided markets article harvard business. Imposing restrictions on the extent of coordination failure among.
Caillaud and jullien 2003, rochet and tirole 2003 and 2006, armstrong, 2006 chicken and egg. The paper offers an introduction and a road map to the burgeoning literature on twosided markets. Antitrust twosided markets typically have network effects and as such are likely to tip toward a single dominant platform. What does the theory of twosided markets tell us about. Song 2011 extends their model two two sided markets with a two indirect network effects. Rochet and tirole platform competition in twosided markets 993. These can be further divided into two types, according to whether each of the two or multiple sides is searching for each other or only one is. Jean tiroley december, 2002 abstract many if not most markets with network externalities are twosided. Consumers are heterogeneous in how much they value the externality. Stanford bus21 martin westhead mastering marketing platforms twomultisided markets how to make money by giving things away 2. Recently, however, exchangetraded funds have become increasingly engaged in twosided markets between investors and stock borrowers. Broadly speaking, a twosided market is one in which 1 two sets of agents. Supreme court issues landmark decision on twosided markets. Because of the crossgroup externalities, prices in twosided markets can be either higher or lower than prot maximizing prices in onesided markets.
The paper offers an introduction and a road map to the burgeoning literature on two sided markets. Asymmetric networks in twosided markets attila ambrus and rossella argenziano. However, there is general agreement that accounting for the linkages between the two sides of the market is important. In the media context, the platform is the broadcast company or companies. Newspapers, for instance, join subscribers and advertisers. We show that a content provider provides the premium content. Third, the dissent argues that the majoritys definition of a twosided situation is not clear, so the legal test laid down in the majority opinion will be difficult to apply in practice in twosided transaction markets, only one market should be defined. This means that, without considering the two sides simultaneously, researchers will obtain incorrect markups even with consistent demand estimates. Jeancharles rochet jean tirole march 12, 2004 abstract the paper o. In twosided matchmaking contexts, both sides are searching for each other. Furthermore, the distribution of prices faced by the two sides influences market participation and the overall volume of demand.
In many industries, platforms court two or more sides that use the platform to interact with each other. The economics of twosided markets american economic. As the debate over reg ii suggests, these enduser fees are arguably a crucial item of interest when considering regulation of payment cards or, more generally, twosided markets. The nonneutrality of the subsidy allocation indicates that it is ultimately an open empirical question as to the most effective way to structure subsidies in. Pdf onesided logic in twosided markets julian wright. Broadly speaking, a twosided market is one in which 1 two sets of agents interact through an intermediary or platform, and 2 the decisions of each set of agents affects the outcomes of the other set of agents, typically through an externality. And sort of ordinary competition markets and one sided markets. Antitrust policy for twosided markets by erik hovenkamp ssrn. A two sided market, also called a two sided network, is an intermediary economic platform having two distinct user groups that provide each other with network benefits. March 2015 abstract we study how vertical integration in a twosided media market a ects investments in premium content. Indeed, if the analysis just stopped there, pretty much any market would be twosided, since buyers and sellers need to be brought together for. Exclusionary pricing in twosided markets sciencedirect. Worse, it could even immunise many situations from effective antitrust enforcement. A two sided market i a market where firms act as platforms and sell two different products to two different groups of buyers taking into account that demand from one group of buyers depends on demand from the other.
Indeed, if the analysis just stopped there, pretty much any market would be twosided, since buyers and sellers need to be brought together for markets to exist and gains from trade to be realized. The economics of two sided markets are important for a wide variety of public policy issues. What is new in the two sided market theory, is that in equilibrium, the ratio of fees for the two market sides should be proportional to the ratio of their price elasticities not the other way around. Firstparty content, commitment and coordination in twosided. Jan 20, 2010 we provide a roadmap to the burgeoning literature on two. Companies in industries such as banking, software, and media make money by linking markets from different sides of their customer networksaudiences and. The economics of twosided markets were pioneered by caillaud and jul. Antitrust policy for twosided markets by erik hovenkamp. Products and services that bring together groups of users in two sided networks are platforms. Identifying twosided markets tilburg university research portal.
Broadly speaking, a twosided market is one in which 1 two sets of agents interact through an intermediary or platform, and 2 the decisions o. The failure of the coase theorem is necessary but not sufficient for two. The organization that creates value primarily by enabling direct interactions between two or more distinct types of affiliated customers is called a multi sided platform. When platform competition is intense, more consumers subscribe to theplatform hosting the superstar exclusively. The most significant element of the courts holding is that, for purposes of determining. Platforms are horizontally differentiated, and seek to attract users of two groups who singlehome and enjoy indirect network externalities from the size of the opposite user group active on the same platform. Indeed, if the analysis just stopped there, pretty much any market would be two sided, since buyers and sellers need to be brought together for markets to exist and gains from trade to be realized. This means that, without considering the two sides simultaneously, researchers will obtain. The economics of twosided markets are important for a wide variety of public policy issues. Platform competition in twosided markets jeancharles rochet. This case has important implications for determining antitrust.
Conceptually, the theory of twosided markets is related to the theories of network externalities and of market or regulated multiproduct pricing. The side with the lower price elasticity pays less than the other side and is even often. Disentangling positive and negative externalities on twosided markets. Feb 20, 2018 a hallmark of twosided marketsthose in which platforms competeis the need to get both sides on board. A two sided market occurs when two user groups or agents interact through an intermediary or platform to the benefit of both parties. What is new in the twosided market theory, is that in equilibrium, the ratio of fees for the two market sides should be proportional to the ratio of their price elasticities not the other way around. Network externality and subsidy structure in twosided. This article studies incentives for a premium provider superstar to offer exclusive contracts to competing platforms mediating the interactions between consumers and firms. In this section, i discuss the impact on some parts of antitrust and regulation, and discuss some important cases. To succeed, platforms in industries such as software, portals and media, payment systems and the internet, must \get both sides of the market on board. Broadly speaking, a two sided market is one in which 1 two sets of agents interact through an intermediary or platform, and 2 the decisions of each set of agents affects the outcomes of the other set of agents, typically through an externality.