Two-sided markets and merger control Benoît Durand Economics Director The UK’s Competition Commission BIICL, London, 16 Novembre 2007

What is a two-sided market? Dating club Women Men access fee An intuitive example: the dating game Matchmakers: intermediate between the two sides of a market.

How does this work? Male demand for dating club is a function of access fee and number of women. Every additional woman accessing the dating club increases its value for men. But each woman does not take this effect fully into account. Externality! Compensate women for this external benefit they provide (e.g. waive access fee). Probability of finding a match rises and men are charged a higher fee.

Common Features of Two-sided Markets Two distinct groups of customers (2 sides of the market) –E.g. Men and Women, Advertisers and Readers etc… Externality – presence of indirect network effect –Value that one group of customers receives increases with the number of other users A Platform –Intermediary that “connects” both sides of the market

Why should we care about two-sided markets? Platform pricing strategy will take into account these network effects to get everyone on board: –Aggregate price (pricing level) will depend on how sensitive overall demand is to price change (i.e. demand elasticity) as well as the marginal cost of running the platform –But access pricing to each group of customers (pricing structure) might have little to do with access costs Pricing structure far more critical than pricing level in a two-sided market

Key factor Any economic transaction involves two or more parties, yet not all markets are two-sided –A market is two-sided only when the total volume of transaction depends on the distribution of prices (Rochet and Tirole (2004)) E.g. the dating club might increases the number of dates by charging less for women and more for men, yet it keeps the aggregate access price constant –The platform acts like a quasi-regulator (cross-subsidies) the more you benefit the network the less you pay to use it

Many markets share these characteristics The number of markets sharing these characteristics is enormous: –TV, radio, newspaper –Video game –Publication software –Card payments –Stock markets –Yellow pages directories –Scientific journals

When does it matter for merger control? Recent UK CC merger experience –LSE / Euronext /Deutche Borse –BskyB / ITV Markets have two-sided markets features, but two-sidedness of the market was very peripheral to the assessment Recent EU cases –Travelport/Worldspan