Two-sided Market Model Research Articles

Prediction and Identification in Two-Sided Markets

I introduce a reduced form two-sided market model to study prediction and identification in two-sided markets. The model generates the hallmark features of two-sided markets: potentially below cost or even negative prices to one side of the market, and the “see-saw” or “waterbed” effect of a tendency for price movements across sides to be negatively correlated. I show that the standard “one-sided” model of complements is a special case of the two-sided model, and that it generates those same hallmark features of two-sided markets. The model of complements also performs well in predicting price effects even when the data is actually generated by the two-sided market model; the “wrong” model often delivers the right answers and can be used to estimate market power and pass through rates. I show that even a naive one-sided model that ignores any relationship across goods/sides can perform well when prices to one side of the market are censored at zero, a very common outcome in two-sided markets. The main cost to using a model of complements to estimate cross-group effects in a two-sided market is that it invites the use of invalid instruments. I show that these findings are consistent with the empirical regularities and identification strategies in the existing two-sided market and indirect network effects literatures. I conclude by discussing the general difficulty of separately identifying whether price differences across subgroups of users of a platform are driven by pricing of network effects or simple price discrimination based on price elasticity.

A Mobile Platform's In‐App Advertising Contract Under Agency Pricing for App Sales

Unlike advertising in traditional media, a mobile platform's in‐app advertising market exhibits two unique features—split structure of the mobile platform with a platform owner and an app developer jointly provisioning in‐app advertising, and agency pricing for app sales. We develop a two‐sided market model to analyze the role of these two unique features in determining the platform owner's optimal advertising revenue‐sharing contract. Our results reveal an interesting N‐shaped dynamic regarding the platform owner's optimal choice of her ad revenue share with respect to the overall advertisers’ valuation of in‐app ads. We identify a between‐agent subsidization strategy for the platform owner, where she finds it optimal to subsidize the developer via the advertising channel, leading to greater profits for both of them. We find that the advertising revenue‐sharing contract under agency pricing for app sales leads to a higher app price than would be offered by the integrated platform found in traditional advertising. However, the ad price is coordinated under the platform owner's optimal choice of ad revenue share when she obtains revenue from both the advertising and app sales channels, leading to an alignment of her interest with the app developer's on ad level.

Strategic Agents and Vertical Relationship in Two-Sided Markets

This paper introduces two modifications to standard two-sided market models. In the first modification, one side of the agents (advertisers) make strategic choices (on quality of their ads) which affect the utility of agents joining the same platform on the other side. We show that this feature of strategic agents leads to qualitatively different econometric specifications for the estimation of group externality parameters. Relative to benchmark case, prices on both sides are lower under strategic agents, benefiting the agents at the cost of platforms. In the other modification, we introduce independent retailers between platforms and agents on the other side (readers). Our results suggest that this modification has no impact on estimating the group externality parameters. However, equilibrium prices on either side depend on group externality parameters at both sides. This is in sharp contrast to standard results where prices on one side depend only on group externality parameter of the other side. In the special case where each platform is split into two independent divisions, we find that equilibrium price is the same across all four divisions. Moreover, this common price depends on the product of the group externality parameters of the two sides.

Bundling, à la carte pricing and vertical bargaining in a two-sided model

We develop a two-sided market model with an upstream–downstream structure. More specifically, the platform consists of two rival upstream firms and a downstream monopolist. Each upstream firm negotiates the input price (license fee) with the downstream monopolist and also chooses the amount of advertising that is embedded in the good it sells to the downstream monopolist. The downstream monopolist can offer the two goods either on an à la carte basis or as a bundle. We use this model to understand the incentives to bundle and the welfare properties of bundling in a two-sided market framework. We also contribute to the ongoing debate on à la carte pricing in the TV industry, where the two upstream firms can be viewed as two rival TV networks and the downstream monopolist as a cable operator. We show that an à la carte regulation will raise consumer surplus and downstream profit, while it will decrease the profits of the upstream TV networks.

Tipping in two-sided markets with asymmetric platforms

This paper examines tipping in the Armstrong (2006) two-sided market model. By adding simple cost asymmetries, we show that the model is quite robust to differences in network size and deviations from 50–50 market share. It well represents situations where asymmetries compensate for one another; for example, one platform might incur marginal costs to court developers and make up for it with lower costs to users. Our tests also make clear that the Armstrong model implicitly contains an intrinsic utility–a value intrinsic to the platform and not its complementary goods–even when no model parameter explicitly expresses it. These results improve interpretation of the many studies that use the Armstrong model for policy analysis.

Price cap regulation in a two-sided market: Intended and unintended consequences

This paper studies intended and unintended consequences of price cap regulation in the two-sided payment card market. The recent U.S. debit card regulation was intended to lower merchants' card acceptance costs by capping interchange fees at the issuer cost, but for small-ticket transactions the interchange fee instead rose post-regulation. To address the puzzle, I construct a two-sided market model and show that card demand externalities between large-ticket and small-ticket transactions rationalize card networks' pricing response. Based on the model, I provide a welfare assessment of the issuer cost-based interchange regulation and discuss alternative regulatory approaches.

Tying to Foreclose in Two-Sided Markets

Abstract This paper analyzes the effect of tied-in sales by an essential goods monopolist in a two-sided market. In a two-sided market, the essential goods monopolist may tie a good essential for users, such as an operating system, with a platform, such as a media player, in the user side of the market, to extract profits not from the user side, but from the developer side of the market. From this simple idea, we build a simple two-sided market model and show how the essential goods monopolist may tie a platform with the essential goods on the user side of the market to foreclose a rival firm from the developer side of the market. We also analyze various welfare impacts of tying and discuss the antitrust implications.

移动产业双边市场的商业模式研究—以苹果公司为例

移动终端市场增长迅速，可观的市场前景为全球移动产业提供了巨大的利润和发展的空间。国内企业如何在社会转型的时代背景下建立创新的商业模式，该问题具有重要的理论及实践意义。苹果公司所建立的商业模式值得研究与学习。本文围绕商业模式的问题，基于对苹果公司案例分析，对移动产业生态圈需要建立的“双边市场”商业模式理论进行了详细阐述，并为中国移动产业未来发展提供了理论启示和发展建议。 The demand for mobile devices and intelligent terminals has increased hugely in recent years, which creates a great mobile market. In this background, Chinese companies need to know how to build the innovative business model to seize the opportunity. And it is worth researching the case of Apple Inc., which achieves great commercial success in this industry. Based on case study from Apple Inc. and research on mobile industry ecosystems, this paper illustrates the two-sided market model that Chinese enterprises in mobile industry have to build, and also gives the theoretical implications and development advices.

Two-part tariff competition between two-sided platforms

Two-sided market models in which platforms compete in two-part tariffs, i.e., a subscription and a per-transaction fee, are often plagued by a continuum of equilibria. This paper incorporates heterogeneous trading behavior of agents into the existing framework. We show that this natural and realistic extension yields a unique equilibrium that has several reasonable properties. The equilibrium stays unique as the heterogeneity vanishes, thereby selecting a unique equilibrium from the continuum that exists under homogeneous trading behavior. We show that this equilibrium differs from equilibria obtained through other selection criteria. The analysis also provides novel empirical predictions.

An Economic Analysis of Two-Sided Market Strategy Under the Threat of Advertisement De-Embedding Service by a Third Party

Recently third parties provide advertisement-removal services for digital contents, threatening the two-sided market business model of copyright holders. This paper suggests a modified version of the two-sided market model that allows a third party to actively de-embed advertisements from the copyright holder’s contents. Analysis shows both the third party and the copyright holder may coexist even if the third party completely de-embeds the advertisements, as long as only some users are indifferent to advertisements. When there are no advertisement indifferent content users, there is an optimal degree of de-embedding for the third party, balancing the survival of the two sided market model and the third party’s profit. Efficiency of detecting the use of de-embedding services and social welfare under different third party objectives are also analyzed. This paper provides practical implications for copyright holders who are under the threat of advertisement de-embedding services.

Demand Externalitites and Price Cap Regulation: Learning from a Two-Sided Market

This paper studies unintended consequences of price cap regulation in the presence of demand externalities in the context of payment cards. The recent U.S. debit card regulation was intended to lower merchant card acceptance costs by capping the maximum interchange fee. However, small-ticket merchants found their fees instead higher after the regulation. To address this puzzle, I construct a two-sided market model and show that card demand externalities across merchant sectors rationalize card networks’ pricing response. Based on the model, I study socially optimal card fees and an alternative cap regulation that may avoid the unintended consequence on small-ticket merchants.

MARKET DOMINANCE AND SEARCH QUALITY IN THE SEARCH ENGINE MARKET

We analyze a search engine market from a law and economics perspective and incorporate the choice of quality-improving innovations by a search engine platform in a two-sided model of Internet search engine. In the proposed framework, we first discuss the legal issues the search engine market raises for antitrust policy through analysis of several types of abusive behavior by the dominant platform. We also explore possible consequences of monopolization of the search engine market for advertisers and users in the form of excessive pricing and deterioration of the quality of the search results. Second, in the technical analysis part, we incorporate these considerations in a two-sided market model and analyze the rate of innovation, pricing, and quality choices by the dominant search engine. Our findings show that a dominant monopoly platform results in higher prices and underinvestment in quality-improving innovations by a search engine relative to the social optimum. More generally, we show that monopoly is sub-optimal in terms of harm to advertisers in the form of excessive prices, harm to users in the form of reduction in quality of search results, as well as harm to the society in the form of lower innovation rates in the industry.

Multi-Sided Markets with Heterogeneous Users and Negative Externalities

Mass media such as newspapers, radio and television play an important role in our daily lives. With vast improvements in technology over the past two decades, new (social) mass media industries such as Social Network Sites (SNS), Weblogs and Podcasts have emerged as strong contenders. These industries act as a platform and serve more than one group of customers; this is known as a multi-sided market. Each customer group exert externalities on each other. With social media, the inter-group and intra-group externalities are stronger and more relevant. Advertisers are usually one of these groups of customers and they may exert negative externalities on other users. This feature is not often studied in the multi-sided market literature. We aim to model such industries by constructing a micro-founded two-sided market model with heterogeneous consumers where one side exerts negative externalities on the other. Examining how the platform can maximize profits within these constraints, we find that where negative externalities exist, not all potential advertisers will participate in the market. This amount of advertisers may also be less than socially optimal. Next, we extend the model to a three-sided market to mimic the SNS industry which includes application developers as a third group of consumers. We find similar results hold on the number of advertisers. We also find that the equilibrium number of application developers is not socially optimal. These results may be due to the interplay of externalities between and within each group. They present interesting insight on the efficiency of such type of markets.

A Two-Sided Market Model of Optimal Price Structure for Instant Messenger

Instant messenger (IM) is one of the most popular Internet applications all over the world. This paper examines the pricing problem of IM based on two-sided market model. IM serves as a two-sided platform, which gets both Internet users and advertisers on board. This paper concludes that IM operator adopts a heavily skewed price structure that favors IM users both under monopolistic case and under horizontal differentiated duopolistic case. When advertising revenue is large enough relatively to marginal cost for serving IM users, IM users can enjoy free service provided by IM operators. The competitive equilibrium of duopolistic case is not necessarily symmetric when advertisers choose singlehoming. Even in the symmetric equilibrium platform would rather deter all advertisers.

Market Dominance and Quality of Search Results in the Search Engine Market

We analyze a search engine market from a law and economics perspective and incorporate the choice of quality improving innovations by a search engine platform in a two-sided model of internet search engine. In the proposed framework we, first, discuss the legal issues the search engine market raises for antitrust policy through analysis of several types of abusive behavior by the dominant search engine. We also provide the discussion of the possible consequences of monopolization of the search engine market for advertisers and users in the form of excessive pricing and deterioration of the quality of the search results. Second, in the, technical analysis part we incorporate these considerations in the two-sided market model and analyze the rate of innovation, pricing, and quality choices by the dominant search engine. Our findings show that dominant monopoly platform results in higher prices and underinvestment in quality improving innovations by a search engine relative to the social optimum. More generally, we show that monopoly is sub-optimal both in terms of harm to advertisers in the form of excessive prices, harm to users in the form of reduction in quality of search results, as well as harm to the society in the form of lower innovation rates in the industry.

Broadband Coverage, Content Innovation, and the Network Neutrality Debate

We examine the link between network neutrality and content innovation on the Internet by comparing the impact of network neutrality and packet discrimination regimes on content innovation. We do this in the context of a two-sided market model that simultaneously considers content provider and consumer decisions concerning market entry and participation while taking into account consumers’ response to network congestion. We find that content innovation flourishes under network neutrality to a greater degree than under packet discrimination due to two effects we uncover: the generation of what we call a pro bono innovation zone in which content providers are able to enter the market without contributing to network provider profits; and the cross-side congestion effect, a negative network externality wherein higher broadband coverage levels result in greater congestion for content providers, and increased content results in greater congestion for consumers, taking into account consumers’ strategic response to network congestion. These results have important implications for current public policy debates regarding the Federal Communications Commission’s Open Internet Rules.

Network neutrality on the Internet: A two-sided market analysis

We discuss network neutrality regulation of the Internet in the context of a two-sided market model. Platforms sell broadband Internet access services to residential consumers and may set fees to content and application providers on the Internet. When access is monopolized, cross-group externalities (network effects) can give a rationale for network neutrality regulation (requiring zero fees to content providers): there exist parameter ranges for which network neutrality regulation increases the total surplus compared to the fully private optimum at which the monopoly platform imposes positive fees on content providers. However, for other parameter values, network neutrality regulation can decrease total surplus. Extending the model to a duopoly of residential broadband ISPs, we again find parameter values such that network neutrality regulation increases total surplus suggesting that network neutrality regulation could be warranted even when some competition is present.

Platform Competition and Access Regulation on the Internet

We analyze the welfare implication of regulating the price of last-mile access to consumers provided by local Internet service providers (ISPs). We consider a new two-sided market model that highlights the vertical relationship between two platforms, a local ISP and a large content provider called a Content Network Platform (CNP) that plays the role of platform in the content markets. The welfare implication of regulating the Internet access depends on which of the two platforms holds a dominant factor in creating consumer demand for the Internet. If the ISP's Internet subscription price is the dominant factor, regulation alleviates inefficiencies due to the ISP's market power and, thus, is likely to improve welfare.

Market Dominance and Quality of Search Results in the Search Engine Market

We analyze a search engine market from a law and economics perspective and incorporate the choice of quality improving innovations by a search engine platform in a two-sided model of internet search engine. In the proposed framework we, Orst, discuss the legal issues the search engine market raises for antitrust policy through analysis of several types of abusive behavior by the dominant search engine. We also explore the possible consequences of monopolization of the search engine market for advertisers and users in the form of excessive pricing and deterioration of the quality of the search results. Second, in the technical analysis part we incorporate these considerations in a two-sided market model and analyze the rate of innovation, pricing, and quality choices by the dominant search engine. Our Ondings show that a dominant monopoly platform results in higher prices and underinvestment in quality improving innovations by a search engine relative to the social optimum. More generally, we show that monopoly is sub-optimal both in terms of harm to advertisers in the form of excessive prices, harm to users in the form of reduction in quality of search results, as well as harm to the society in the form of lower innovation rates in the industry.

Platform competition for advertisers and users in media markets

This paper analyzes a two-sided market model in which platforms compete for advertisers and users. Platforms are differentiated from the users' perspective but are homogenous for advertisers. I show that, although there is Bertrand competition for advertisers, platforms obtain positive margins in the advertising market. In addition, platforms' profits can increase in the users' nuisance costs of advertising. As a general insight, I obtain that factors affecting competition in the user market in a well-known direction without externalities now have opposing effects due to competition in the advertiser market. The model can also explain why private TV platforms benefit if their public rivals are regulated to advertise less—a result at odds with models in which there is no competition for advertisers.