Recent developments in two-sided markets

ESAM 07

Julian WrightNational University of Singapore

July 4th, 2007

Published papers

Caillaud & Jullien (2003) Armstrong (2006)

INDUSTRY SPECIFIC APPLICATIONS

Armstrong & Wright (2007), Caillaud & Jullien (2001), Evans (2003a, 2003b), Hagiu (2006, 2007), Jullien (2005), Noke, Peitz & Stahl (2007), Parker & Van Alstyne (2005), Rochet & Tirole (2006), Schiff (2003), Wright (2003)

Fixed-to-mobile InternetMedia Payment systems

Newspapers: Gabszewicz, Laussel & Sonnac (2001, 2002, 2005, 2006); Magazines: Kaiser & Wright (2006) Yellow Pages: Rysman (2004) TV: Anderson & Coate (2005)

Armstrong (2002), Armstrong & Wright (2007), Gans and King (2000), Valletti & Houpis (2005), Wright (2002);

Rochet & Tirole (2003)

Debit/Credit Cards: Baxter (1983), Gans and King (2003a, 2003b, 2003c), Guthrie & Wright (2007), Rochet (2003), Rochet & Tirole (2002), Schmalensee (2002), Wright (2003, 2004)

Net-neutrality: ?????

Exchanges: e-bay, B2B markets, flea markets, shopping malls, trading posts, chatlines, dating agencies, nightclubs, employment agencies, real estate agencies, stock exchanges, brokerage firms, online intermediation, conferences, expos and trade fairs

Advertising-supported Media: directory services (e.g. Yellow Pages), magazines, newspapers, public TV operators, web portals, search engines

Transaction Systems: debit and credit card payment systems, fixed-to-mobile phone calls

Software platforms: computer operating systems, video game consoles, word processors, PDAs, 3G mobile

Examples

Definition(s) of two-sided markets

PLATFORM(S)

A B

aA aBNon-neutrality(the allocation of fees between the sides must matter)

Externalities between the two sides

Configuration:platform must interact

with both sides

Two-sided platforms: Hagiu (2007)

Buyers

Pure platform

Sellers

affiliation

sale

affiliation

Buyers

Pure merchant

Sellers

sale

sale

“A pure two-sided platform leaves control to sellers, whereas a merchant takes over full control”

Lines of research

• Price structure: “Topsy-turvy principle” - subsidize the side which provides greater surplus to the other side

• Multiple equilibria, expectations, coordination• Divide and conquer strategies• Multihoming and competitive bottlenecks• Competition policy: market definition, exclusivity• Industry studies: real-estate, software platforms,

stock exchanges, health providers, journals …• Empirical studies and econometric issues

Competitive bottleneck

PLATFORM 1 PLATFORM 2

consumers0 1

Y

x

y

s1s2

n1 n2

Competitive bottleneck

• Buyers select their preferred platform– v-p1-tx+bBn1 on platform 1

– v-p2-t(1-x)+bBn2 on platform 2

– s1=1/2 + (p2-p1 +bB(n1-n2)) / 2t

• Sellers multihome to reach all consumers– y+bSs1-r1 on platform 1, y~U(-,Y] with density 1

– y+bSs2-r2 on platform 2, y~U(-,Y] with density 1

– Implies n1=Y+bSs1-r1 and n2=Y+bSs2-r2

• Solution is s1=1/2 + (bB(r2-r1)+p2-p1)/(2(t- bBbS))

Competitive bottleneck

• Platform i maximizes (pi-c)si+(ri-f)ni

• p*=c + t - bBbS - bS(r*-f)• r*= (Y+bS/2+f)/2 – bB/4• rB+P=r*• rw=f-bB/2 < r*

• Eqm: maximizes platform profit plus buyer surplus• Too few sellers on board (half as many as welfare max)• Cheaper on singlehoming side, possibly free• Expensive on multihoming side• Market failure not due to lack of competition

Net neutrality

• The Internet seen as an open platform– End-to-end design – All data treated equally– No discrimination beyond different end-user plans– Certainly not over types of applications or user specific– Content providers, not platforms, control their users– Can think of as two-sided platform

• Technology is available for network owners to prioritize or de-prioritize certain packets, possibly based on prices, or drop them altogether

• E.g. Verizon plans to keep 80% of network capacity for its own services

Net neutrality

• Different definitions and opposing viewswww.savetheinternet.com vs.www.handsoff.org

• Net neutrality fails if platform providers take control over who receives particular content or on what terms

• Examples of hypotheticals– Telstra de-prioritizes or even blocks access by its

customers to other rival ISP websites– Telstra makes MSN search work faster than Google– Telstra signs up e-bay’s website exclusively in Australia– Telstra makes VOIP websites run slower for its customers

Net neutrality

• Arguably many concerns are covered by existing competition law

• Content providers are sophisticated and will monitor speed etc

Net neutrality

• Allow networks to charge content providers

• Competitive bottleneck concern applies– Users only sign up to one ISP– ISP controls access to these users– Content providers multihome to reach

users– ISPs will not compete for content providers– Distorted price structure; too little content

Net neutrality

Concerns may be alleviated since:– Content providers may commit to exclusive contracts

thereby reversing the outcome– Strategic content providers (MSN, Google, Yahoo,

Amazon, e-bay …) could threaten to leave ISP– Even niche content providers may have some bargaining

power if there are group of users attached to them– Where is the customer loyalty – to the platform

(switching costs) or specific content (product differentiation)?

– Users may multihome (office, home, mobile, …)– Neutrality: content provider may also pass fees back to

users

Net neutrality

Problems with net neutrality– Inefficiency if cannot discriminate for different

quality of service or willingness to pay– Lack of investment in capacity– Result could be fragmentation of the Internet – In part, debate is about distribution of profit

between content providers and platforms