Lectures on Competition and Regulation in Two-Sided Markets

Abstract

Lecture slides on Competition and Regulation in Two-Sided Markets

Full text

Platform Markets
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advertisers to viewers (ad nuisance)"
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– Allow applications developers and users to interact"
• Platform provide services for applications developers (e.g.,
obtain access to the hardware for the computing device in question)."
• Users can run these applications only if they have the same
software platform as that relied on by the developers."
• Developers can sell their applications only to users that have
the same software platform they have relied on in writing their
applications."
– Examples"
• Operating systems"
• Smartphones"
• Video game platforms"
• Digital music devices"
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A. Game developers!
B. Users!
A to B: +!
B to A: +!
In A: -!
In B: +!
A. Advertisers!
B. Viewers!
A to B: - (+?)!
B to A: +!
In A: / (-?)!
In B: /!
A. Women!
B. Men!
A to B: +!
B to A: +!
In A: / (-?)!
In B: / (-?)!
A. Merchants!
B. Consumers!
A to B: +!
B to A: +!
In A: -!
In B: /!
14

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Intuition"
! Platforms have
a monopoly for
access to
singlehomers."
! Singlehomers
are courted."
! Multihomers are
exploited."
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Platform 1!
Platform 2!
buyers!sellers!
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Platform 1!
Platform 2!
buyers!
(singlehoming)!
sellers!
(multihoming)!
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29

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• Competitive bottlenecks (cont’d)"
– Charge “monopoly prices” in multihoming market"
– High profits on the multihoming side but
dissipation of these profits through the
competition on the singlehoming side."
– Illustration"
• Advertisers multihome, eyeballs don't (and even if they do,
repetition effect) → Subsidize eyeballs (even if ads exert a
positive externality on viewers)"
– Endogenous multihoming"
• Easy to divide but difficult to conquer"
– Multihoming reduces tipping by facilitating
coexistence of platforms."
30

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Forces leading to
concentration
Positive cross-side external effects
Positive within-side external effects
Scale economies
Forces leading to
coexistence of platforms
Multihoming
Negative external effects
Platform differentiation
(horizontal or vertical)
Congestion (at the level of the
individual platform)
31

!"9#V)81>#*,2&48#,.#;4)5,(*#
>,*;&<<,=#
32

W#*,2&4#,.#;4)5,(*#>,*;&<<,=#
• Model"
– '&?5#$Y5-1.%%A&7$[,#,-<.1,7&"%.;5#96&
– 3.66&)&5:&O0A,#6&.-7&9.66&)&5:&6,%%,#6&0-$:5#9%A&7$61#$O01,7&5-&q(K)r2&
– !&O0A,#&.1&"%.;5#9&!&O0A6&)&0-$1&:#59&,.4?&6,%%,#&5-&1?$6&"%.;5#92&
– 80A,#&X&6,%%,#&60#"%06&JH#566&5:&.-A&5""5#10-$1A&4561L&5:&@$6$<-H&"%.;5#9&!^&
(#)#
3.66&)&5:&O0A,#6N&%$-,.#&1#.-6"5#1&4561&τ4&&
34)5,(*#!# 34)5,(*#9#
3.66&)&5:&6,%%,#6N&%$-,.#&1#.-6"5#1&4561&τs&&
Membership
fees set by
platform i
Net gain from trade
for each unit on the
seller side
Net gain from trade
for each unit on the
buyer side
Number of sellers and
of buyers active on
the platform
33

$+,/812&2#81=H4&%,*1=H&J)L#
• Model (cont’d)"
– 80A,#6&.-7&6,%%,#6&.#,&#,61#$41,7&15&@$6$1&5-%A&5-,&"%.;5#9&
• Q$-H%,?59$-H&5-&,.4?&6$7,&
– P.#<4$".<5-&60_4$,-1%A&.c#.4<@,&
• !%%&O0A,#6&.-7&6,%%,#6&".#<4$".1,^&
– M$9$-H&
• P%.;5#96&6$90%1.-,506%A&6,1&9,9O,#6?$"&:,,6&5-&O51?&6$7,62&
• 80A,#6&.-7&6,%%,#6&6$90%1.-,506%A&4?556,&D?$4?&"%.;5#9&15&@$6$12&
• 80A,#6&.-7&6,%%,#6b&7,4$6$5-6&
– Z-7$[,#,-1&.H,-16^&61.-7.#7&`51,%%$-H&6",4$C4.<5-&
34

$+,/812&2#81=H4&%,*1=H&J'L&
• 80A,#6&.-7&6,%%,#6b&7,4$6$5-6&J45-1b7L&
– m,@,%5"$-H&1?,&"#,@$506&,F"#,66$5-6&A$,%76&
• !-&.77$<5-.%&6,%%,#&.c#.416&u/τb .77$<5-.%&O0A,#62&
• !-&.77$<5-.%&O0A,#&.c#.416&π/τs&.77$<5-.%&6,%%,#62&
– !6609"<5-&
• Z-7$#,41&-,1D5#B&,F1,#-.%$<,6&.#,&-51&155&61#5-H^&
(u/τb) (π/τs) < 1 5#K&,j0$@.%,-1%AK&uπ < τbτs!
• /1?,#D$6,&5-%A&5-,&"%.;5#9&D50%7&O,&.4<@,&J<""$-HL&&
35

$+,/812&2#81=H4&%,*1=H&J=L&
• 80A,#6&.-7&6,%%,#6b&7,4$6$5-6&J45-1b7L&
– Q5%@$-H&1?,&"#,@$506&$9"%$4$1&,F"#,66$5-6^&
• V09O,#&5:&O0A,#6&J6,%%,#6L&.1&5-,&"%.;5#9&
– -51&5-%A&u&D$1?&9,9O,#6?$"&:,,&:5#&O0A,#6&J6,%%,#6L&5-&1?$6&
"%.;5#9&
– 4,/&'5.*&u&D$1?&9,9O,#6?$"&:,,&:5#&.%55%-.&J4,1%-.L&&
O,4.06,&5:&$-7$#,41&-,1D5#B&,[,416&
36

• P%.;5#96b&"#$4$-H&7,4$6$5-6&
– P%.;5#9&ib6&"#5O%,9^&
– >$#61R5#7,#&45-7$<5-6&
&&&&&$-&.&6A99,1#$4&,j0$%$O#$09&
!6&$-&1?,&61.-7.#7&
`51,%%$-H&957,%&
e.%0,&15&1?,&"%.;5#9&5:&
.77$<5-.%&O0A,#6&1?.1&5-,&
.77$<5-.%&6,%%,#&.c#.416&
e.%0,&15&1?,&"%.;5#9&5:&
.77$<5-.%&6,%%,#6&1?.1&5-,&
.77$<5-.%&O0A,#&.c#.416&
$+,/812&2#81=H4&%,*1=H&JGL&
37

$+,/812&2#81=H4&%,*1=H&J*L&
• &&
38

• P%.;5#96b&"#$4$-H&7,4$6$5-6&J45-1b7L&
– V.6?&,j0$%$O#$09&9,9O,#6?$"&:,,6&
– ",40%$.#$1A&5:&1?,&957,%^ market is fully covered&&&
• !&"#$4,&#,704<5-&OA&5-,&"%.;5#9&75,6-b1&%,.7&15&9.#B,1&
,F".-6$5-&O01&5-%A&15&.-&$-4#,.6,&$-&9.#B,1&6?.#,6&J5-&O51?&
6$7,6L&
– M?,&6$7,&5:&1?,&9.#B,1&1?.1&,F,#16&.&61#5-H&J"56$<@,L&
,F1,#-.%$1A&5-&1?,&51?,#&1,-76&15&O,&60O6$7$Y,72&
– M?,&6$7,&5:&1?,&9.#B,1&D$1?&%$c%,&"#57041&7$[,#,-<.<5-&
1,-76&15&".A&.&%5D,#&:,,2&
– → confirms qualitative results obtained in the
monopoly platform case.&
$+,/812&2#81=H4&%,*1=H&JSL&
39

• Q0OH.9,R",#:,41&,j0$%$O#$09&
– Ej0$%$O#$09&".#<<5-^&,j0.%&6"%$1&5:&O0A,#6&.-7&"#570416&
– Ej0$%$O#$09&-,1&60#"%06,6&
• Z-4#,.6$-H&$-&1?,&-,1&H.$-&5:&1?,&51?,#&6$7,&.-7K&15&.&%,66,#&
,F1,-1K&$-&1?,&-,1&H.$-&5:&1?,&5D-&6$7,2&
– Ej0$%$O#$09&"%.;5#96b&"#5C16^&
• m,4#,.6,&D$1?&1?,&6$Y,&5:&$-7$#,41&-,1D5#B&,F1,#-.%$1A2&
• T?Av&M?,A&9.B,&O0A,#6&.-7&6,%%,#6&95#,&@.%0.O%,&15&.c#.41&.-7&
1?06&$-1,-6$:A&"#$4,&459",<<5-2&
• M#0,&.6&%5-H&.6&O51?&"%.;5#96&.#,&.4<@,2&
$+,/812&2#81=H4&%,*1=H&JUL&
40

:,*;&<<J&#N,X4&=&>-8&J)L&
• E[,416&5:&90%<?59$-H&
– Q0""56,&6,%%,#6&4.-&90%<?59,&D?$%,&O0A,#6&4.-&5-%A&6$-H%,?59,2&
– !&6,%%,#&%561&15&5-,&"%.;5#9&$6&-51&.&6,%%,#&H.$-,7&OA&1?,&51?,#&"%.;5#92&
– Z-1,#9,7$.#$,6&?.@,&15&O,&95#,&45-4,#-,7&D$1?&%56$-H&O0A,#62&
– Z-1,#9,7$.#$,6&459",1,&C,#4,%A&:5#&O0A,#62&
(#)#
80A,#6&
34)5,(*#!# 34)5,(*#9#
Q,%%,#6&
Multihomers
41

• 357,%&
– Z-7$[,#,-1&.H,-16&
• Q.9,&.6&O,:5#,&:5#&O0A,#6^&$-7$[,#,-4,&O,1D,,-&1?,&'&"%.;5#96&
• >5#&6,%%,#6^&$-7$[,#,-4,&O,1D,,-&"%.;5#9&!&.-7&-5&".#<4$".<5-&
– m,@,%5"$-H&1?,&"#,@$506&,F"#,66$5-6&A$,%76&
:,*;&<<J&#N,X4&=&>-8#J'L#
42

• 357,%&J45-1b7L&
– Q5%@$-H&:5#&"%.;5#96b&"#$4$-H&7,4$6$5-6&
• /-&1?,&6,%%,#&6$7,K&"%.;5#96&?.@,&95-5"5%A&"5D,#2&
– Z:&1?,A&:5406,7&5-%A&5-&6,%%,#6K&1?,A&D50%7&4?.#H,&.&95-5"5%A&"#$4,&
,j0.%&15&Cs/2 + π/4 J.6609$-H&1?.1&,.4?&6,%%,#&D50%7&?.@,&.44,66&15&?.%:&5:&1?,&O0A,#6&.-7K&
1?,#,:5#,K&D50%7&?.@,&.&H#566&D$%%$-H-,66&15&".A&,j0.%&15&π/4L2&
– M?$6&"#$4,&$6&.7h061,7&75D-D.#7&OA&u/4&D?,-&1?,&$-7$#,41&-,1D5#B&
,F1,#-.%$1A&1?.1&6,%%,#6&,F,#1&5-&1?,&O0A,#&6$7,&$6&1.B,-&$-15&.4450-12&
• /-&1?,&O0A,#&6$7,K&"%.;5#96&4?.#H,&1?,&`51,%%$-H&"#$4,K&Cb + τbK&
%,66&.&1,#9&1?.1&7,",-76&5-&1?,&6$Y,&5:&1?,&$-7$#,41&-,1D5#B&
,[,4162&
:,*;&<<J&#N,X4&=&>-8#J=L#
43

!"@#'B(7%&(#2&J&4,;*&=78#
44

!"@#'B(7%&(#2&J&4,;*&=78#
• Y,=/,N8&(J)N1417?#,.#;(1>&8#
• 0&44&(#1=J&87*&=7#
• $+,/;)(7#7)(1U8#
• A=8B4)<=H#7)(1U8#
• 3(1>&/1=>(&)81=H#>,*;&<<,=#
• Z17%1=/812&#&U&>78#
45

!"#QY,=S#,N8&(J)N1417?#,.#;(1>&8##
• \,:,#,-4,^&8,%%,W.99,&.-7&P,$1Y&J'()=&0-"0O%$6?,7LK&6,,&
.%65&`.H$0&.-7&`.%.O0#7.&J'()G&ZiZ/L&
• T?.1&$:&-51&.%%&"#$4,6&4.-&O,&5O6,#@,7&OA&,@,#A5-,v&
– e$7,5&H.9,6&9.#B,16&
• +.9,&7,@,%5",#6&B-5D&:,,6&4?.#H,7&OA&"%.;5#96&15&,-7&06,#6&O01&1?,&
#,@,#6,&$6&-51&1#0,2&
• P%.;5#96&659,<9,6&$-:5#9&1?,&9.#B,1&.O501&#,704<5-&$-&1?,&45616&5:&
7,@,%5"$-H&H.9,6&:5#&1?,9&J,2H2K&Q5-A&.--50-4,7&401&$-&1?,&"#$4,&:5#&
7,@,%5",#6&$-&'((U&.-7&$-&'((]L2&
– m.-4,&459",<<5-&#,.%$1A&6?5D62&
• I.-&O,&6,,-&.6&1D5R6$7,7&"%.;5#96&%$-B$-H&4,%,O#$<,6&.-7&@$,D,#6K&
D$1?&"56$<@,&4#566R6$7,&,[,416&5-&O51?&6$7,62&
• P51,-<.%&.6A99,1#A&$-&D?5&B-5D6&D?.1&.O501&9,9O,#6?$"&:,,6&5-&
1?,&1D5&6$7,6&5:&1?,&"%.;5#92&
– I,%,O#$<,6&.#,&%$B,%A&15&O,&.D.#,&5:&D?.1&@$,D,#6&".A&15&D.14?&1?,&6?5D2&
– e$,D,#6&9.A&-51&B-5D&D?.1&B$-7&5:&"#$Y,&95-,A&$6&H$@,-&15&4,%,O#$<,62&
• M?,&"%.;5#9&9.A&1.B,&9,.60#,6&15&7$64%56,&"#$4,&$-:5#9.<5-2&
46

• 357$C,7&957,%&
– !6609"<5-6&.O501&"#$4,&5O6,#@.O$%$1A&
• !H,-16&5O6,#@,&1?,&:,,6&1?.1&1?,&'&"%.;5#96&6,1&5-&1?,$#&5D-&6$7,2&
• 801&1?,A&9.A&-51&5O6,#@,&1?,&:,,6&6,1&5-&1?,&51?,#&6$7,^&
– Q,%%,#6&?.@,&"#5O2&
σ
i&15&5O6,#@,&1?,&O0A,#&:,,&6,1&OA&"%.;5#9&i
– 80A,#6&?.@,&"#5O2&
β
i&15&5O6,#@,&1?,&6,%%,#&:,,&6,1&OA&"%.;5#9&i&
(#)#
80A,#6&
34)5,(*#!# 34)5,(*#9#
Q,%%,#6&
σ
1
σ
2
β
1
β
2
!"#QY,=S#,N8&(J)N1417?#,.#;(1>&8#J'L#
47

• 357$C,7&957,%&J45-1b7L&
– MD5R6$7,7&6$-H%,?59$-H&
– V5&4561&5:&#,H$61,#$-H&06,#6&JCb = Cs = 0L&
– M$9$-H&5:&1?,&H.9,&
)2 P%.;5#96&)&.-7&'&4?556,&1?,&6?.#,&5:&.H,-16&1?,A&D.-1&15&$-:5#9&
.O501&"#$4,6&J$2,2K&
σ
i .-7&
β
iN&.6609,&$-:5#9.<5-&$6&4561%,66L2&
'2 P%.;5#96&)&.-7&'&6,1&1?,$#&9,9O,#6?$"&:,,62&
=2 !H,-16&5-&O51?&6$7,6&7,4$7,&D?$4?&"%.;5#9&15&@$6$12&
– Ej0$%$O#$09&45-4,"1&
• ",#:,41&8.A,6$.-&,j0$%$O#$09&
• O,%$,:6&5-&0-5O6,#@,7&"#$4,6&?.@,&15&O,&:5#9,7&
• )88B*;<,=F&$:&C#9&7,@$.1,6&:#59&,j0$%$O#$09&"#$4,&5-&5-,&6$7,&
0-$-:5#9,7&06,#&,F",416&1?.1&"#$4,&5-&1?,&51?,#&6$7,&$6&.7h061,7&65&
.6&15&-,01#.%$Y,&".#<4$".<5-&5-&1?,&51?,#&6$7,&Jk$-60%.<-H&O,%$,:6lL&
!"#QY,=S#,N8&(J)N1417?#,.#;(1>&8#J=L#
48

• Q5%0<5-&
– Z-7$[,#,-1&06,#6^&
– P%.;5#96&-,,7&15&459"01,&1?,&6?.#,&5:&.H,-16&5-&,.4?&6$7,&1?.1&
D$%%&#,.41&5#&-51&15&.&957$C4.<5-&5:&1?,$#&9,9O,#6?$"&:,,62&
– Q,%%,#&6$7,&
• P#5O.O$%$1A&
σ
1 → O0A,#&:,,&5-&"%.;5#9&)&$6&5O6,#@,7&&→ 45##,41&
,F",41.<5-&5:&1?,&-09O,#&5:&O0A,#6&D?5&D$%%&h5$-&"%.;5#9&)^&
• P#5O.O$%$1A&(1-
σ
1) → O0A,#&:,,&5-&"%.;5#9&)&$6&=,7#5O6,#@,7&→
,j0$%$O#$09&,F",41.<5-&5:&1?,&-09O,#&5:&O0A,#6&D?5&D$%%&h5$-&"%.;5#9&)^&
→ #,j0$#,9,-1^&:0%C%%,7&,F",41.<5-6&.1&,j0$%$O#$09^&
• !-.%5H506&:5#90%.<5-&:5#&"%.;5#9&'&
– m,C-,&O0A,#&6$7,&OA&.-.%5HA&&
Expected
numbers
!"#QY,=S#,N8&(J)N1417?#,.#;(1>&8#JGL#
49

• Q5%0<5-&J45-1b7L&
– I5-6,j0,-1%A^&
– Z9"56,&:0%%&".#<4$".<5-^&
– M5&C-7&1?,&-09O,#&5:&.H,-16&h5$-$-H&1?,&'&"%.;5#96&.6&.&
:0-4<5-&5:&1?,&:50#&9,9O,#6?$"&:,,6K&D,&9061&1?,-&65%@,&
!"#QY,=S#,N8&(J)N1417?#,.#;(1>&8#J*L#
50

• Q5%0<5-&J45-1b7L&
– P%.;5#9&)b6&"#5H#.9&
– Q$9$%.#%A&:5#&"%.;5#9&'&
– Q5%@,&1?,&6A61,9&5:&G&>/I6&
– \,j0$#,9,-1&5-&O,%$,:6&
– Q5%@$-H&A$,%76&
!"#QY,=S#,N8&(J)N1417?#,.#;(1>&8#JSL#
51

9"#0&44&(8[#1=J&87*&=7#
• !O61#.41&957,%&5:&1#.7,&5-&.&"%.;5#9&J8,%%,W.99,&
.-7&P,$1YK&E0#5",.-&E45-59$4&\,@$,D&'()(L&
0 1
Mass 1 of buyers; draw their location from a uniform distribution
(private information); linear transport cost τb
Platform 1 Platform 2
K sellers; each sells a mass 1/K of products; draw their location
from a uniform distribution (learn it after investment decision;
private information); linear transport cost τ.
52

0&44&(8[#1=J&87*&=7#J'L&
• I59".#$65-&O,1D,,-&
– Intermediated trade^&'&:5#R"#5C1&"%.;5#96&
– Non-intermediated trade^&'&:#,,&"%.;5#96&JO,-4?9.#BL&
• Z-&=&7$[,#,-1&9.#B,1&61#0410#,6&
– 851?&6$7,6&5:&1?,&9.#B,1&6$-H%,?59,&
– Q,%%,#6&90%<?59,K&O0A,#6&6$-H%,?59,&
– 80A,#6&90%<?59,K&6,%%,#6&6$-H%,?59,&
• Q,%%,#&$-@,619,-16&
– Different types^&I561&#,704<5-K&j0.%$1A&$9"#5@,9,-1K&
9.#B,<-H&9,.60#,6&1?.1&:.4$%$1.1,&"#$4,&7$64#$9$-.<5-&5#&
7,9.-7&,F".-6$5-&
– Long-term decisions H$@$-H&4599$19,-1&15&6,%%,#6&
• m,4$7,7&O,:5#,&6,%%,#6&B-5D&1?,$#&5""5#10-$1A&45616&5:&@$6$<-H&"%.;5#96&.-7&O,:5#,&
"%.;5#96&6,1&1?,$#&"#$4,62&
53

• M$9$-H&:5#&$-1,#9,7$.1,7&1#.7,&
– Stage 1^&Z-1,#9,7$.#$,6&6$90%1.-,506%A&6,1&
9,9O,#6?$"&:,,6&5-&O51?&6$7,6&5:&1?,&9.#B,1&J:5#&
6,%%,#6K&:,,&$6&",#&"#57041L&w&6,%%,#6&.-7&O0A,#6&%,.#-&
1?,$#&%54.<5-&J1?$6&$6&"#$@.1,&$-:5#9.<5-&:5#&1?,9L&
• Q,%%,#6&.#,&,F&.-1,&$7,-<4.%&
• M?$6&61.H,&7$6."",.#6&$:&1#.7,&$6&-5-R$-1,#9,7$.1,72&
– Stage 2^&Q,%%,#6&.-7&O0A,#6&7,4$7,&D?$4?&"%.;5#9J6L&
15&@$6$1&
– Stage 3^&Q,%%,#6&6,1&1?,&"#$4,&5:&1?,$#&H5576&
6$90%1.-,506%A&
• !6609"<5-^&Q,%%,#6b&"#$4$-H&7,4$6$5-6&.#,&$-7,",-7,-12&
– Stage 4^&80A,#6&9.B,&"0#4?.6$-H&7,4$6$5-6&
• !6609"<5-^&!&O0A,#&.1&"%.;5#9&i&?.6&.&75D-D.#7R6%5"$-H&7,9.-7&:0-4<5-&
:5#&,.4?&"#57041&1#.7,7&5-&1?$6&"%.;5#9&
0&44&(8[#1=J&87*&=7#J=L&
54

• \,704,7R:5#9&#,"#,6,-1.<5-&5:&O0A,#R6,%%,#&
$-1,#.4<5-&
– Net gains from trade absent any investment"
• >5#&O0A,#^&u(&
• >5#&6,%%,#^&π(&
– Net gains from trade after investment"
• >5#&O0A,#^&u1&=&u(&+ Δu
• >5#&6,%%,#^&π1&=&π(&+ Δπ&
• T,&.%65&"#5"56,&9$4#5R:50-7.<5-6&:5#&1?,6,&
H,-,#$4&:0-4<5-62&
0&44&(8[#1=J&87*&=7#JGL&
55

• 6)1=#(&8B478F#Q,%%,#6&9.A&?.@,&61#5-H,#&
$-4,-<@,6&15&$--5@.1,&$:&459",<-H&"%.;5#96&.#,&
:5#R"#5C1&.-7&4?.#H,&9,9O,#6?$"&:,,62&
• Why?"
– m0,&15&:5#R"#5C1&$-1,#9,7$.<5-K&6,%%,#6&".#1%A&
$-1,#-.%$Y,&$-4#,.6,6&$-&45-609,#&60#"%06&#,60%<-H&
:#59&1?,$#&$-@,619,-12&
• When? Z1&7,",-76&5-&
– Market structure JD?$4?&6$7,&5:&1?,&9.#B,1K&$:&.-AK&
90%<?59,6vL&
– Type of investment J?5D&75,6&$1&.[,41&6,%%,#6b&"#5C16&
.-7&45-609,#&60#"%06vL&&
0&44&(8[#1=J&87*&=7#J*L&
56

• Both sides singlehome (e.g., specialized magazines)"
• Surplus (gross of any opportunity cost) of visiting platform i!
– Suppose 0 ≤ k ≤ K sellers have invested, so measure κ = k/K of
products benefit from an innovation"
– Indifferent types"
Membership
fees set by
intermediary i
Number of buyers
and of products on
the platform
0&44&(8[#1=J&87*&=7#JSL&
57

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62

• Micro foundation of buyer-seller relationship
and of different types of investment. "
0&44&(8[#1=J&87*&=7#J)'L&
63

• References: Armstrong (Rand 2006), Reisinger
(European Economic Review 2014)"
• Platforms often charge two-part tariffs to at least
one of the sides, i.e., combinations of"
– Membership (or subscription) fees, and "
– Usage (or per-transaction) fees"
• Examples"
– Software platforms → developers are charged a fixed
fee for getting access to the system’s source code and
in addition pay royalties for the applications they sell to
users."
– Credit card systems."
• Implications of this form of price discrimination on
the profits of competing platforms and on the
welfare of the two sides?"
$+,/;)(7#7)(1U8#J)L&
64

• Modified model"
– Buyer & seller surplus (gross of any opportunity cost) of visiting
platform i:"
– Platform i’s profit"
– Each platform has now 4 choice variables."
• General result: there exist a continuum of
equilibria in the price-setting game."
Usage fees set by platform i
Per-transaction cost
$+,/;)(7#7)(1U8#J'L&
65

• Two-sided singlehoming (Armstrong, RAND, 2006)"
– Suppose that c = 0 and 4τbτs > (u+π)2
– A continuum of symmetric equilibria exist with platforms charging$
Tb = Mb + mbns and Ts = Ms + msnb, where"
– Platforms’ profit at equilibrium:"
• Increasing in the usage fees."
• Why? High usage fees reduce, and even overturn, the cross-side network
effects that make the platform market so competitive."
– Multiple equilibria arise because each platform has a continuum of
best responses for a given choice of tariff by its rival."
• Different combinations of fixed and usage fees yield same profit. "
$+,/;)(7#7)(1U8#J=L&
66

• Competitive bottlenecks (Reisinger, European Economic Review
2014)"
– Same problem of continuum of equilibria with two-part tariffs."
– The profit and the welfare of the two sides is different in each
of these equilibria. → Model lacks predictive power."
– Proposed solution"
• Allow for heterogeneous trading behavior of agents on both sides."
• → Unique equilibrium even in the limit as the heterogeneity
vanishes."
– Model"
• Sellers can multihome; buyers can only singlehome."
• On each side: 2 types differ with respect to their trading behavior."
– A mass b of buyers interact with each seller only with probability
β
<1."
– A mass s of buyers interact with each buyer only with probability
σ
<1."
– with b , s > 0 but small."
• Platforms are unable to price discriminate across types. "
$+,/;)(7#7)(1U8#JGL&
67

• Competitive bottlenecks (cont’d)"
– Buyer & seller surplus"
– Leads to a unique equilibrium, even with b,s → 0"
• See details in Reisinger (2014)."
• Note: his model differs slightly from the one presented
here"
– Notation"
– Distribution of sellers"
$+,/;)(7#7)(1U8#J*L&
68

• Competitive bottlenecks (cont’d)"
– Intuition"
• The two types react differently to a particular combination
of the membership and the usage fee."
– E.g., seller of type s trades less often → to keep his utility
constant, an increase in usage fee must be coupled with a
smaller reduction of the membership fee than to keep the
utility of a seller of regular type constant."
• → The effect on profit of a marginal change in i’s usage
fee is no longer a constant multiple of the effect of a
marginal change in i’s membership fee. "
– This multiple varies continuously as the fees change because
the ratio of the two types that join platform i also varies
continuously."
• → Each platform has a unique optimal combination of the
fees as a reaction to the price quadruple of its rival."
$+,/;)(7#7)(1U8#JSL&
69

• General references: Weyl (American
Economic Review 2010, Weyl and White,
unpublished 2013)"
• General idea: firms may set complex tariffs
which insulate one side of the market from
the other"
• One-dimensional setting: firms offer
consumers certain “utility levels”"
– “satisfaction guarantees” (Anderson and Peitz,
unpublished 2013)"
A=8B4)<=H#7)(1U8#J)L&
70

• Return to the two-sided single-homing
Hotelling model"
– Recall: when platforms set participation fees:"
– Competition in satisfaction levels "
• Users are insures against “unexpected” changes in
platform participation on the other side"
– Equilibrium satisfaction levels translate into
equilibrium membership fees"
• Reason: no feedback effects on platform
participation from one side to the other "
A=8B4)<=H#7)(1U8#J'L&
71

• Competition on two-sided markets may be price-
increasing"
– Böhme and Müller (2010)"
• Compare monopoly and duopoly model of a two-sided market."
– Consumers / Advertisers"
– If 2 platforms, consumers singlehome while advertisers multihome."
• The two settings are fully comparable"
– Homogeneous good produced at zero costs without capacity constraints"
– Identical parameterization of market sizes."
• They solve for duopoly equilibrium and monopoly optimum, with
and without subsidization (prices below marginal cost) of one
market side."
• Main result: there exists a continuum of economically plausible
parameter sets for which duopoly equilibrium prices exceed
optimal monopoly prices and one with no observable price effect of
competition (i.e., one where optimum and equilibrium prices
become equal)."
• Effect of competition on total welfare? Ambiguous in subsidization
cases, but strictly positive if no subsidization takes place."
3(1>&/1=>(&)81=H#>,*;&<<,=#J)L&
72

• Price-increasing competition (cont’d)"
– Intuition"
• Two conflicting effects of competition"
– Traditional effect of reducing prices."
– Demand-enhancing effect on the single-homing market
side, which drives prices upwards."
• It is possible that the former effect does not fully
compensate the latter effect, which either causes no
observable price effect or price-increasing
competition."
– Implications"
• Merger analysis → mergers do not necessarily lead
to higher prices in two-sided markets"
3(1>&/1=>(&)81=H#>,*;&<<,=#J'L&
73

• So far"
– Focus on cross-side effects."
– Competition among existing platforms."
• To be considered"
– Within-side effects → competition among sellers."
– Launch of a new platform"
• Belleflamme and Toulemonde (IER, 2009)"
– Can a for-profit platform succeed in an environment
where agents have the possibility to interact on a
free (public or open) platform?"
– If yes, how?"
– What are the effects of within-side effects (intra-
group externalities)?"
Z17%1=/812&#&U&>78#J)L&
74

• Main intuition"
– New platform faces a “chicken-and-egg” problem."
– Way to solve it → “divide-and-conquer” pricing strategy"
• Subsidize the participation of one side (divide) and recover the loss
on the other side (conquer)"
– Within-side effects (rivalry) blur the picture"
• Willingness to pay of rival agents ↑ if only a few move"
• Good news: rival agents’ care less about other group's participation. "
• Bad news: other group less willing to join if only a few rival agents
join"
• Main results"
– Benchmark (no rivalry): always profitable to launch the new
platform with appropriate divide-and-conquer strategy"
– Rivalry in one group: within-side effects may undermine all
attempts to launch the new platform."
Z17%1=/812&#&U&>78#J'L&
75

• Model"
– 2 groups of homogeneous agents, 1 and 2: N1≥ 3 and N2≥3
agents"
– At t = 0, the 2 groups interact on a free platform"
– At t = 1, intermediary considers launching a competing
platform"
– Both sides single-home"
– πi(ni , nj) → gross benefit for an agent of type i from interacting
on a platform with ni agents of its own type and nj agents of the
other type"
– Properties"
of benefit functions:"
Z17%1=/812&#&U&>78#J=L&
76

• Benchmark: no rivalry"
– Notation"
• Benefit functions: π1(n2), π2(n1)
• Initial benefits: π1(N2), π2(N1) → Outside option (endogenous!)"
• If Niπi(Nj) > Njπj(Ni) , then group i is ‘high-value group’ "
– Timing"
• Intermediary sets membership fee A1 for agents of group 1."
• Agents of group 1 choose whether to switch to the new platform
or not."
• Intermediary sets membership fee A2 for agents of group 2."
• Agents of group 2 choose whether to switch to the new platform
or not."
– Equilibrium concept: subgame perfection with unique
implementation!
• Intermediary must set fees so that a unique NE ensues (with
participation of both groups)"
Z17%1=/812&#&U&>78#JGL&
77

• Benchmark: no rivalry (cont’d)"
– Lemma 1. Suppose group j is non rival and does not move
before group k. Then all agents of group j make the same
switching decision."
• Why? Homogeneous agents and no effect on other group’s moves."
– Stage 4. 2 potential NE"
• No agent switches iff A2 > π2(n1) - π2(N1 - n1)
• All N2 agents switch iff A2 ≤ π2(n1) - π2(N1 - n1)
– Stage 3. Highest fee compatible with N2 agents moving"
– Stage 2. No NE with 0 < n1 < N1 agents of group 1 switching."
• (More complicated argument than for stage 4!)"
Z17%1=/812&#&U&>78#J*L&
78

• Benchmark: no rivalry (cont’d)"
– Stage 2. 2 potential equilibria"
– Stage 1. Unique implementation: select fee such that n1 = N1 is
the unique equilibrium in stage 2"
• A1 = - π1(N2)"
• Intermediary’s profits: -N1 π1(N2) + N2 π2(N1)
• Positive if group 2 is high-value group"
• Otherwise, start with group 2"
– Optimal conduct: (1) subsidize low-value group, (2) tax high-
value group"
– All agents move (same result with simultaneous switching) "
Z17%1=/812&#&U&>78#JSL&
79

• Effects of rivalry"
– Main effects"
• The group of rival agents might partition at equilibrium."
• The launch of the new platform may not be profitable."
• The sequential and simultaneous games may yield different
outcomes."
– Notation"
• Rival group: πr(ni , nr)
• Independent group: πi(nr)
– Example: linear specification"
Z17%1=/812&#&U&>78#JUL&
80

• Effects of rivalry – linear specification"
– Area 1. Subsidize rival agents"
– Area 2. Subsidize rival agents (sequential) / No profit
(simultaneous). "
– Area 3. No profit. "
– Area 4. Q0O6$7$Y,&$-7,",-7,-1&.H,-16&"
αr-αi
µ Ni(αr-αi)%
(αr-αi)%
2Ni
Nr+4%
(αr-αi)%
Ni
Nr
1"
2"
3"
4"
Z17%1=/812&#&U&>78#J{L&
81

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101

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103

VIEWERS PLATFORMS ADVERTISERS
attention
attention
6&21)#*)(-&78&J'L&
104

• I59".#$65-&.4#566&9,7$.&
– !950-1&5:&<9,&6",-1&06$-H&7$[,#,-1&1A",6&5:&9,7$.&
" Total time with media has
gone up from 2004 to 2009
in the US.
" This is due to the time
spent using the Internet,
which has increased by
117% over the six years.
Q50#4,^&!-7,#65-&J'()'L&
')>78#)N,B7#*&21)#*)(-&78#)=2#)2J&(<81=H#J)L&
105

')>78#)N,B7#*&21)#*)(-&78#)=2#)2J&(<81=H#J'L&
Source: PwC, IAB (2013)
106

')>78#)N,B7#*&21)#*)(-&78#)=2#)2J&(<81=H#J=L&
Source: PwC, IAB (2013)
107

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– I59".#$65-&O,1D,,-&4561&",#&1?506.-7&@$,D6&JIP3&
#.1,6L2& " Rates for the Internet are
among the lowest.
" Potential explanations
" Formats with larger
captive audience are
worth more to advertisers.
" TV and radio ads are
harder to ignore and
bypass because they take
up real time.
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108

')>78#)N,B7#*&21)#*)(-&78#)=2#)2J&(<81=H#JGL&
Source: PwC, IAB (2013)
109

• !&4%56,#&%55B&.1&1?,&Z-1,#-,1&
– m$6"%.A&.7@,#<6$-H&#,@,-0,6&
" In 2011, Facebook surged past
Yahoo! To become the biggest
force in America’s online display ad
market.
" In aggregate, search sites lead
display ad revenues. Business and
finance sites and social networks
come next.
(see Anderson, 2011)
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110

• !&4%56,#&%55B&.1&1?,&Z-1,#-,1&J45-1b7L&
– M$9,&6",-1&5-%$-,&
" Search sites lead ad revenues
despite the fact that search activity is
not what people spend most time upon
on the Internet.
Q50#4,^&M?,&@.%0,&5:&:#$,-76?$"2&>.4,O55B&$6&%$B,%A&15&O,459,&.&H.#H.-10.-&459".-A2&M?.1&D$%%&
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111

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112

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• M#.-6:5#9.<5-&5:&1?,&"#54,66&5:&O0A$-H&.-7&6,%%$-H&.7@,#<6$-H&6".4,&
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W2#;(1>1=H#,=#7%&#A=7&(=&7#J'L&
113

W2#;(1>1=H#,=#7%&#A=7&(=&7#J=L&
Source: PwC, IAB
(2013)
• /-&1?,&Z-1,#-,1&J45-1b7L&
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114

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115

• 8.6$4&957,%&
" Take a particular website
delivering a visitor.
" How should the site price its ads
(supposing MC=0)?
" How does the site’s decision
compare with the social optimum?
" In the figure: too little
advertising (whether nuisance
to consumers are taken into
account or not).
" If MSC shifted upward, results
can be reversed
<'-0!('5&.*)!'5&)*./&
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W2J&(<81=H#)=2#*&21)F#V)81>#1=81H%78#J'L&
116

• 8.6$4&957,%&J45-1b7L&
" We add the possibility that ads have some
positive marginal benefit to those consuming
the website content.
" This benefit would be manifested as some
positive expected consumer surplus from
buying the good advertised.
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117

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level for the platform is at the point
where marginal revenue from the
advertising side of the market
equals the marginal net cost to
consumers: am.
" Price per ad = pa
" Access price for consumers = E +
area S + T - U. (! Could be negative)
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marginal cost (i.e., a positive
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" The marginal revenue from the
ad market is negative: two-sided
market balance has the web-site
going beyond the ad revenue
maximizing point because the
consumer enjoys the ads and a
higher subscription price can be
extracted.
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5,00
5,50
6,00
6,50
7,00
7,50
8,00
8,50
9,00
9,50
10,00
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Minutes / Hour
Year
ABC
CBS
NBC
FOX
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133

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135

# Net neutrality as zero price charged by residential ISPs to CPs
# Possibly, introducing zero price non-restrictive
# Question: Can outcome with positive price on the ISP-side be
replicated by appropriate price structure on user side?
# Question of neutrality with respect to pricing on user or ISPs
side
# In an idealized world consumers could be priced according
to congestion cost, volume, and prioritization
# In reality:
# Strong opposition to throttling
# Strong opposition to prioritization on user side
# Strong opposition to dynamic pricing
# Additional issue: transparence issue with respect to data
intensity of services; consumers in a worse position than
CPs to make the appropriate decision
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143

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148

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150

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151

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152

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158