Pricing of Platforms in Two-Sided Markets with Heterogeneous Agents and Limited Market Size

Abstract

We study a two-sided market represented by network platforms and heterogeneous agents. Our setup departs from Armstrong (2006)’s monopoly model by assuming both (1) a continuum of agents of limited size on each side of the market and (2) heterogeneous utility of agents with Hotelling specification. We show that the monopoly’s optimal pricing strategy always results in a corner solution in terms of the equilibrium market share. We also solve for the social planner’s optimization problem and obtain a similar corner solution result. In addition, the exact values for the equilibrium in the case of duopoly for a two-sided market on two platforms are obtained.