1. Recent developments in two-sided markets ESAM 07 Julian Wright National University of Singapore.
July 4th, 2007

2. INDUSTRY SPECIFIC APPLICATIONS
Published papers
Caillaud & Jullien (2003)
Rochet & Tirole (2003)
Armstrong (2006)
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)
INDUSTRY SPECIFIC APPLICATIONS
Fixed-to-mobile
Media
Payment systems
Internet
Armstrong (2002), Armstrong & Wright (2007), Gans and King (2000), Valletti & Houpis (2005), Wright (2002);
Newspapers: Gabszewicz, Laussel & Sonnac (2001, 2002, 2005, 2006); Magazines: Kaiser & Wright (2006) Yellow Pages: Rysman (2004) TV: Anderson & Coate (2005)
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: ?????

3. Examples
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
Transaction Systems: debit and credit card payment systems, fixed-to-mobile phone calls
Advertising-supported Media: directory services (e.g. Yellow Pages), magazines, newspapers, public TV operators, web portals, search engines
Software platforms: computer operating systems, video game consoles, word processors, PDAs, 3G mobile

4. Definition(s) of two-sided markets
Configuration:
platform must interact with both sides
PLATFORM(S) aA
Non-neutrality aB
(the allocation of fees between the sides must matter) A B
Externalities between the two sides

5. Two-sided platforms: Hagiu (2007)
“A pure two-sided platform leaves control to sellers, whereas a merchant takes over full control”
Sellers
Sellers
affiliation
sale
sale
Pure platform
Pure merchant
affiliation
sale
Buyers
Buyers

6. 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

7. Competitive bottleneckx 1
consumers s1 s2
PLATFORM 2
PLATFORM 1 Y n1 n2 y

8. 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))

9. 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

10. 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

11. Net neutrality Different definitions and opposing views
vs.
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

12. Net neutrality
Arguably many concerns are covered by existing competition law
Content providers are sophisticated and will monitor speed etc

13. 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

14. 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

15. 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