T WO -S IDED P LATFORMS : U NDERSTANDING THE M ECHANISM AND E XPLORING O PPORTUNITIES FOR D ATA A NALYSIS Takanori Adachi School of Economics, Nagoya University May 19, 2015

I NTRODUCTION I’m going to talk about economic principles to understand the characteristics of “places” where online transactions take place. “Two-sided Platforms” I’m not going to talk about the relationship to data analysis in details. 2

R OADMAP 1. What are two-sided platforms? - Cross-group externalities 2. Understanding the mechanism - Pricing in the presence of cross-group externalities 3. Connection to data analysis 3

1. W HAT ARE TWO - SIDED PLATFORMS ? Digitalization: Many economic transactions take place online. (1) Transactions are digitally recorded.  Opportunities for researchers “Big data” (2) “Places” are also digital.  Virtual places can be understood as “platforms.” 4

1. W HAT ARE TWO - SIDED PLATFORMS ? Platforms: “Places” where two groups interact. Example: Search engines Compete Google Yahoo Platform Side/Group Users Advertisers Cross-group externalities (“I am happier if there are more and more people on the other side.”) 5

Other examples of two-sided platforms (roughly in chronological order): - OS - Video Games Internet Age! - E-commerce sites - (Celebrities’) Blogs - Broadcasting/Video platforms (YouTube, Ustream, etc.) - SNS （ Facebook, twitter, LINE, Instagram, etc. ） - Smartphones - E-books - Mediation services such as Uber, Airbnb, online dating, etc. - More to come…? - Newspapers, Magazines, TVs, Radios - Credit Cards - Shopping Malls (- Street Markets?) 6

In many cases, “free” on one side. Platform Free ！ Charging fees Side A Side B Compensated Side Profiting Side Cross-subsidization Be brave to make a drastic contrast. “Make a loss to get more profits!” Not necessarily because the cost is almost zero. 7

2. U NDERSTANDING THE MECHANISM We’ll see that in the presence of cross-group externalities, “discriminatory” treatment by platforms is not as harmful as in the situation without externalities. This result is highlighted if the costs for both groups are the same. We look at the following story of “discriminatory pricing” based on: Adachi, T “A Note on “Third-Degree Price Discrimination with Interdependent Demands”,” Journal of Industrial Economics, Vol. 50, No. 2 8

Consider the following two groups. Faculty Students Software Developer 9

Usually, if you and somebody purchase exactly the same product from the same seller, you and he/she pay the same price. Sometimes, not.  “Price Discrimination” First, we compare price discrimination with uniform pricing without cross-group externalities. Then, we introduce cross-group externalities. 10

11

12

13

In sum, 14 Uniform Pricing Aggregate Consumer Surplus 40 Vendor’s Profit 85 Sum （ “Social Welfare” ） 125

15

16

Under price discrimination, the seller can charge a higher price for the faculty group (30) without changing the price for the student group.  The software vendor chooses: price 30 for the faculty group price 20 for the student group The vendor’s profit = 88 17

18

Therefore,  Vendor’s profit is higher under PD. However, consumer surplus is higher under UP. Price discrimination works as the firm’s attempt to exploit more of consumer surplus. 19 Uniform Pricing Price Discrimination Aggregate Consumer Surplus 4020 Vendor’s Profit 8588 Sum （ “Social Welfare” ）

20

21

Exercise (a): Faculty Students Uniform price is still 20. However, the vendor now cuts the price for the student group (30 for the faculty and 15 for the students). 22

In general, it is known that: If the number of consumers is lower or the same under price discrimination, then social welfare is lower. Bertoletti, P “A Note on Third-Degree Price Discrimination and Output,” Journal of Industrial Economics, Vol. 52, No. 3 23

Now, let’s modify the setting to consider “cross-group externalities”. If one student uses the software, Faculty

Similarly, If two students use it, If three students use it, Faculty Faculty

Students are also in the same situation: If one prof uses it: two three Students Students Students

(1) Uniform pricing (UP) The software vendor’s pricing under the uniform pricing: Faculty Students Three Two students members purchase. purchase. Price 23 Software Vendor 27

Compare with the case of no cross-group externalities: Without With Faculty Students Faculty Students Price 20 Price 23 28

29

30

In sum, 31 Uniform Pricing Aggregate Consumer Surplus 43 Vendor’s Profit 100 Sum （ “Social Welfare” ） 143

32

Therefore,. 33 Uniform Pricing Price Discrimination Aggregate Consumer Surplus 4340 Firm’s Profit Sum （ “Social Welfare” ） 143

In summary, With no cross-group externalities, With cross-group externalities, 34 Uniform Pricing Price Discrimination Aggregate Consumer Surplus 4020 Vendor’s Profit 8588 Sum （ “Social Welfare” ） Uniform Pricing Price Discrimination Aggregate Consumer Surplus 4340 Firm’s Profit Sum （ “Social Welfare” ） 143

This example shows that in the presence of cross- group externalities, Bertoletti’s (2004) claim, If the number of consumers is lower or the same under price discrimination, then social welfare is lower. no longer holds.  In the presence of cross-group externalities, “discriminatory” treatment by platforms is not as harmful as in the situation without externalities. 35

Now, suppose that students get more benefits from the usage of professors. If one prof uses it: two three Students Students Students

(1) Uniform pricing (UP) The software vendor’s pricing under the uniform pricing: Faculty Students Three Two students members purchase. purchase. Price 24 Software Vendor 37

Compare with the case of no cross-group externalities: Without With Faculty Students Faculty Students Price 20 Price 24 38

39

40

In sum, 41 Uniform Pricing Aggregate Consumer Surplus 44 Vendor’s Profit 105 Sum （ “Social Welfare” ） 149

42

Therefore,. 43 Uniform Pricing Price Discrimination Aggregate Consumer Surplus 4460 Firm’s Profit Sum （ “Social Welfare” ）

Software Vendor Faculty Student Profiting Side Compensated Side Cross-subsidization “Make a loss to get more profits!” In the presence of cross-group externalities, the conflict between the vendor and student group is mitigated. 44

In summary, With no cross-group externalities, With cross-group externalities (1), With cross-group externalities (2), 45 UniformPrice Dis Cons Surplus 4020 Profit 8588 Social Welfare UniformPrice Dis Cons Surplus 4340 Profit Social Welfare 143 UniformPrice Dis Cons Surplus 4460 Profit Social Welfare

Prices are: Average price Uniform Pricing Price Discrimination Without Externalities(5 people)(2 profs)(2 students) With Externalities (1)(5 people)(3 profs)(2 students) With Externalities (2)(5 peole)(3 profs)(3 students)

In summary, In the presence of cross-group externalities, “discriminatory” treatment by platforms is not as harmful as in the situation without externalities. 47

Exercise (b): Faculty Students It turns out that social welfare is now lower under price discrimination. 48

3. C ONNECTION TO D ATA A NALYSIS A lot of opportunities for data analysis. Existing studies: Magazines/Newspapers, Video games, … In many web-based platforms, transactions are digitally recorded. - Transactions on both sides - High frequency (“Big” data) - User demographics (Privacy concerns) 49

Ex: Effectiveness of Targeted Advertising Rival Competition Internet Portal (prod differentiation) Visit (free) Ads & fee Users/Consumers Advertisers Not only Size but Purchase? Composition would Heterogeneity be also important. 50

H OMEWORK (D UE : M AY 26) 1. Propose a possible research issue in relation to today’s topic, and describe how you can obtain data for it. 2. Describe how today’s topic is related to your own research agenda. English. Send your work to: (undisclosed in this online version) 51

T HANK YOU ! 52