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1
TWO SIDED MARKETS
Bruno Jullien
IDEI and GREMAQ, Toulouse
ESNIE - CARGESE
2
GETTING MULTIPLE SIDES ON BOARD
gamers videogame platform game developers
platform
buyers sellers
buyers
"eyeballs"
cardholders
suppliers
advertisersmerchantsdebit & credit cards
portals, newspapers, TV
B2B platform
Chicken and egg problem. Must get both sides on board/court each side while making money overall.
B2C website
3
1 INTRODUCTION
2 MONOPOLY
3 COMPETITION
4 USAGE FEES
5 COMPETITION POLICY
Organization of lecture
4
Platform enables or facilitates interaction between "buyers" and "sellers"
Buyer
Platform
Seller
usage charge usage charge
+ membership charge + membership charge
5
Some 2SPs:
Exchanges
B2B.
Employment agencies.
Dating services.
Exchanges/auctions (eBay, Amazon).
Real-estate agencies. Futures and securities exchanges
Internet backbone services.
But also...
Academic journals.
Shopping malls.
Telecoms.
Communications
6
What are two-sided markets?
Externality: Participants on one side care about the level of participation and usage of the other side
Differentiated treatment of each side The profit and the allocation depends on the structure of price not only on
the total price.
Not all platforms are 2SM
Example: electricity
Buyer GRID Producer
Bilateral contract
Only the total price charged on the two sides matters, as they negotiate how to share it: similar to tax neutrality
7
A « classical » industry may become a 2SMs
Example 1 : computers / video games
Example 2 : TV operators
Hardware producers
users Operating systemdevelopers
Content(cinema, sport…)
users operator
Advertisers
(vertical desintegration)
8
Illustration : Encoding vs. reading• Adobe Acrobat, Text Processors: free reader, charge or royalties for
encoding.
• Contrast: books.
Illustration : why did credit cards and debit cards adopt so markedly different business models?
• Credit (Visa, MasterCard, Amex): high merchant discount, low (negative) cardholder price.
• On-line debit: low merchant discount.
Often results in very skewed pricing pattern
Illustration : Videogame platforms.
• Sell console at or below cost, royalties on games
9
2.1 MONOPOLY WITH SUBSCRIPTION
For the moment no transaction fee/ cost
( )
( )B B B B S
S S S S B
N D p v N
N D p v N
demandfunctions
externalities
Network size
Platform sellersbuyersAccess cost
Registration RegistrationBp Sp
,B Sc c
10
MONOPOLY PRICES
( ) 1B B S S
B B
p c v N
p
Adjusted margin Demand elasticityfor fixed participation of the other side
Profit:
( ) ( )B B B B B S S S S S S Bp c D p v N p c D p v N
BN
( ) 1S S B B
S S
p c v N
p
Volume / margin trade-off
SN
11
Price will be low/zero/negative if
presence of buyer generates substantial revenue on seller side, buyer side reluctant to get on board (elastic demand).
Standard formula for profit maximization:
Elasticity = % variation in demand for 1% decrease in price.
Example: price to buyers.
Cost = opportunity cost, smaller than cost incurred in serving buyer
[attracting extra buyers generates revenue on seller side either through usage charges or by being able to increase sellers' membership fees.]
12
Comments :
The non adjusted margin is lower on the side where the elasticity is the highest and/or the externality created is larger.
In some cases prices may be negative (if possible, otherwise gifts, tying…) or null (free newspapers)
If one side is captive, the price is higher on this side and smaller on the other side (debit cards).
13
Other examples of skewed pricing patterns:
14
Mind the cross-group externalities
More complex story: within-side externality
Marquee buyers
Platform
Sellers
attracts
Other buyers
large fee (because marquee buyers)
good deal
Illustrations: Amex corporate card.
Killer application/game.
Key store in shopping mall.
15
Welfare: Optimal prices Unrestricted :
Price equal to the net opportunity cost → marginal cost net of the value created for
the members of the other side
B B S S
S S B B
p c v N
p c v N
16
Optimal prices
Budget constraint ( )
( )
B B S S
B B
S S B B
S S
p c v N
p
p c v N
p
Ramsey-Boiteux prices depend on elasticity and on externalities (λ is determined by the budget constraint or cost of public funds)
17
Budget balanced allocation
Ramsey prices with respect to the net opportunity cost
→ marginal cost net of the value created for the members of the other sides
Low or negative price if i) participation generates a relatively higher
externality on the other group, and
ii) the own price demand elasticity is high
18
Monopoly, summary
Competitive access (marginal cost pricing) is not efficient
One price should be below access cost (if no fixed cost), it may be negative.
Similar pattern of price skewness with unregulated monopoly and Ramsey pricing
Monopoly may be more efficient than competitive access
→ Optimal market structure?
19
3 COMPETITION
Variant 1 : single-homing bilateral
• price smaller on both sides• expectations of users play an important role (multiplicity of possible equilibria)• "divide and et conquer"
Platform 1
Platform 2
buyers sellers
20
Two identical platforms Participants register with only one
Competitive benchmark If usages can be fully taxed in a non-distortionary way and
negative registration prices are feasible, then in equilibrium Only one platform is active Zero profit
But conditions are very restrictive!
In general a positive profit equilibrium is possible, unless there is enough homogeneity within sides and coordination between sides
Single-homing and competition
21
Divide and Conquer
Divide and conquer strategies Divide: subsidies one side Conquer: charge participation of the other side
Competition generates “cross-subsidies” From the high externality group to the low externality
There is some scope for positive profit, but much less than in the case of standard network goods uniformly priced
Raise dynamic contestability by limiting the ‘first-mover advantage”
22
Divide and Conquer: example
1 buyer and 1 seller: νB = νS= ν
Platform 1 charges pB and pS>0
Platform 2 charges: pB - ν to buyer and ν to seller Profit pB- cB -cS
Eq. prices if small cost (total cost less than ν) pB= pS= cB +cS (if less than ν) Profit = cB +cS
23
Variant 2 : competitive bottleneck
Platform 1
Platform 2
buyers(single-homing)
sellers(multi-homing)
lower prices for buyers higher prices for sellers
24
Charge « monopoly prices » in multi-homing market High profits on the multi-homing side but dissipation
of these profits through to the single-homing side
Illustration: advertisers multi-home. Eyeballs don't (and even if they do, rehearsal effect). Subsidy eyeballs
Multi-homing and competition
Endogeneous MH: Easy to divide but difficult to conquer
Limits tipping by facilitating coexistence
25
4 USAGE FEES
Fees per transaction / interaction One-sided : only one sided is taxed or tax neutrality Two-sided : Non-commercial transaction, restrictive rules (payment
cards)
Usage fee affects : the probability of “trade”; the net benefits from “trade” (νB, νS ); the platform revenue
Balancing fees: set transaction fees to maximize total surplus from trade, use registration fees for coordination / revenue Same limits as for two-part tariffs: heterogeneity, risk aversion, incentive Mature platforms rely more on registration fees
Two-sided (no registration fees) : same analysis adjusting for the opportunity cost
26
(illustration: no surcharge for payments with card)
The platform as a price regulator.
The platform as a competition authority.
The platform as a licensing/certification authority
(illustrations: exchanges: solvency requirements, prohibition of front-running; dating clubs; Nintendo's mid 80s decision to control quality of third-party games)
2SP performs balancing act through other instruments than membership and usage fees:
(illustrations: auto auctions arbitration processes, eBay’s feedback forum)
The platform as a supplier of information and enforcement.
Regulation of interactions between end-users
27
5 COMPETITION POLICY
The issue is the lack of clear benchmark
Efficiency is not achieved at price equal marginal cost (or TLIC)
Efficiency may require cross-subsidies, or direct subsidyTwo violations of anti-trust: “dumping” on one side,
excessive price on the other side
28
Market definition
Changing the tariff on one side affects the demand and the profit generated on the other side: SNIP test? Estimation of demand elasticity must account for the presence of the
other side : due to feedback effects, the elasticity at fixed participation of the other side is not equal to the apparent elasticity
One or two markets ? Change the evaluation under dominance criterion Yellow pages , medias : two markets, readers and advertising M2M termination charges: two markets (origination, termination) +
regulation of termination (one market should lead to no regulation under EC rules)
Credit cards: one market with 2 sides
29
Price abuse
High price-cost margins do not imply market power even if they are low-fixed costs.
Competitive cross-subsidy Competition leads to more cross-subsidy
Competition leads to more price-discrimination
Another efficiency defence for price below costs
Predation tests: accounting for both sides→ Measure of “total price”→ Switch to effect based approach?
30
Tying as coordination device
Divide and Conquer strategy Subsidy one side
Negative prices may be not feasible Targeted offers Tie a good with registration so that registration has a
value even with no participation of the other side.
31
Indirect network effect
Possibility of coordination failure and multiple equilibria:
Solving the problem may require negative prices and price skewness
( ( ))
( , )B B B B S S S B
B B S
N D p v D p v N
N p p
32
Coordination failure: positive price
N
N
33
Solving coordination failure: one negative price
N
N
34
COMPETITION POLICY
Should we regulate?
No clear distortion
No clear guidelines for regulation
No rational for cost based regulated price
Large informational requirement
The regulatory response may be worse than the (imperfect) market response
Partial regulation (platform neutrality, reciprocal termination charge, …) ?
35
Some ReferencesNon-technical :
David Evans (2003) "Some Empirical Aspects of Multi-Sided Platform Industries," Review of Network Economics, 2: 191-209.
Rochet, J.C. et J. Tirole (2005). "Competition Policy in 2 SMs", mimeo IDEI,forthcoming "Advances in the Economics of Competition Policy".
Jullien, B (2005): “Pricing and other Business Strategies for e-Procurement Platforms”, IDEI working paper, forthcoming “Handbook of Procurement”
D. Evans, D. et R. Schmalensee (2005) “The Industrial Organisation of Markets with Two-Sided Paltforms”, NBER working paper.
36
Some References
Technical :
Rochet, J.C. et J. Tirole (2006) "Two-Sided Markets: A Progress Report", forthcoming, Rand J. Ec.
Armstrong, M. (2006) "Competition in Two-Sided Markets,“ forthcoming, Rand J. Ec.
Caillaud B. et Jullien B. (2003) “Chicken and Egg: Competition between Intermediation Service Provider“, Rand J. Ec., 34.
Jullien, B. (2005) "Two-Sided Markets and Electronic Intermediaries," CESifo Economic Studies, 51.
Rochet, J.C. et J. Tirole (2003) “Paltform Competition in Two-Sided Markets”, Journal of the European Economic Association