Governing Bad Behavior by Users of Multi-Sided Platforms

Abstract

Multi-sided platforms such as exchanges, search engines, social networks, and software platforms create value by assembling and serving communities of people and businesses. They generally solve a transaction problem that prevents agents from coming together to exchange value. An essential feature of these platforms is that they promote positive externalities between members of the community. But as with any community, there are numerous opportunities for people and businesses to create negative externalities, or engage in other bad behavior, that can reduce economic efficiency and, in the extreme, lead to the tragedy of the commons. Multi-sided platforms, acting selfishly to maximize their own profits, often develop governance mechanisms to reduce harmful behavior. They also develop rules to manage many of the same kinds of problems that beset communities subject to public laws and regulations. They enforce these rules through the exercise of property rights and, most importantly, through the “Bouncer’s Right” to exclude agents from some quantum of the platform, including prohibiting some agents from the platform entirely. Private control is likely to be more efficient than social control (through laws and regulation) in dealing with negative externalities on platform communities because the platform owner can monitor bad behavior more closely and deal with this behavior more expeditiously than a public regulator. Therefore, the courts and antitrust authorities should exercise caution in finding anti-competitive exclusion when that exclusion is conducted as part of a private governance mechanism for dealing with bad behavior of some platform users that harm other users. © 2012 David S. Evans. † Chairman, Global Economics Group; Lecturer, University of Chicago Law School; Visiting Professor, Faculty of Laws, University College London. I would like to thank Richard Epstein and Richard Schmalensee for helpful comments; Lauren Chiang, Jacqueline Murphy, Steven Joyce, Margaret Schilt, and Nikhil Tuladhar for excellent research help; and Google for research funding. None of these individuals or entities necessarily agrees with me and I retain sole ownership of any errors. 1201_1250_EVANS_WEB_110612 (DO NOT DELETE) 11/6/2012 5:38 PM 1202 BERKELEY TECHNOLOGY LAW JOURNAL [Vol. 27:1201