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Social Welfare and Cost Recovery in Two-Sided Markets

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  • Bolt Wilko

    ()
    (Research Department, De Nederlandsche Bank)

  • Tieman Alexander F.

    (Monetary and Financial Systems Department, International Monetary Fund)

Abstract

Using a simple model of two-sided markets, we show that, in the social optimum, platform pricing leads to an inherent cost recovery problem. This result is driven by the positive externality of participation that users on either side of the market exert on the opposite side. The contribution of this positive externality to social welfare leads the social planner to increase users' participation by setting prices at both sides of the market such that the total price is below marginal cost. Our result holds for both interior pricing and skewed pricing in two-sided markets. These findings may have interesting consequences for antitrust regulation.

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Bibliographic Info

Article provided by De Gruyter in its journal Review of Network Economics.

Volume (Year): 5 (2006)
Issue (Month): 1 (March)
Pages: 1-15

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Handle: RePEc:bpj:rneart:v:5:y:2006:i:1:n:7

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References

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  1. Roson Roberto, 2005. "Two-Sided Markets: A Tentative Survey," Review of Network Economics, De Gruyter, vol. 4(2), pages 1-19, June.
  2. Evans, David S. & Schmalensee, Richard L., 2005. "The Economics of Interchange Fees and Their Regulation: An Overview," Working paper 105, Regulation2point0.
  3. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers 152, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Richard Schmalensee, 2001. "Payment Systems and Interchange Fees," NBER Working Papers 8256, National Bureau of Economic Research, Inc.
  5. Wright Julian, 2004. "One-sided Logic in Two-sided Markets," Review of Network Economics, De Gruyter, vol. 3(1), pages 1-21, March.
  6. repec:reg:rpubli:105 is not listed on IDEAS
  7. Alexander F. Tieman & Wilko Bolt, 2003. "Pricing Debit Card Payment Services," IMF Working Papers 03/202, International Monetary Fund.
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Cited by:
  1. D. Kennet & Eric Ralph, 2007. "Efficient interconnection charges and capacity-based pricing," International Economics and Economic Policy, Springer, vol. 4(2), pages 135-158, August.
  2. Nicole Jonker, 2007. "Payment Instruments as Perceived by Consumers – Results from a Household Survey," De Economist, Springer, vol. 155(3), pages 271-303, September.
  3. Jullien, Bruno & Rey, Patrick & Sand-Zantman, Wilfried, 2009. "Termination fees revisited," IDEI Working Papers 551, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2012.
  4. David S. Evans & Richard Schmalensee, 2005. "The economics of interchange fees and their regulation : an overview," Proceedings – Payments System Research Conferences, Federal Reserve Bank of Kansas City, issue May, pages 73-120.
  5. Hermalin, Benjamin E & Katz, Michael L, 2006. "Customer or Complementor? Intercarrier Compensation with Two-Sided Benefits," Competition Policy Center, Working Paper Series qt9vf0k91t, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.

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