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Skewed Pricing in Two-Sided Markets: An IO approach

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  • Wilko Bolt
  • Alexander F. Tieman

Abstract

In two-sided markets, one widely observes skewed pricing strategies, in which the price mark-up is much higher on one side of the market than the other. Using a simple model of two-sided markets, we show that, under constant elasticity of demand, skewed pricing is indeed pro?t maximizing. The most elastic side of the market is used to generate maximum demand by providing it with platform services at the lowest possible price. Through the positive network externality, full participation of the high-elasticity, lowprice side of the market increases market participation of the other side. As this side is less price elastic, the platform is able to extract high prices. Our skewed pricing result also carries over when analyzing the socially optimal prices. Interestingly, this leads to below-marginal cost pricing in the social optimum. We motivate the analysis by looking at the Dutch debit card system.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 013.

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Date of creation: Oct 2004
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Handle: RePEc:dnb:dnbwpp:013

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Keywords: Two-sided markets; skewed pricing; corner solution; social optimum.;

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References

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  1. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
  2. Wright Julian, 2004. "One-sided Logic in Two-sided Markets," Review of Network Economics, De Gruyter, vol. 3(1), pages 1-21, March.
  3. Alexander F. Tieman & Wilko Bolt, 2003. "Pricing Debit Card Payment Services," IMF Working Papers 03/202, International Monetary Fund.
  4. Mark Armstrong, 2005. "Competition in Two-Sided Markets," Industrial Organization 0505009, EconWPA.
  5. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers 152, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Richard Schmalensee, 2001. "Payment Systems and Interchange Fees," NBER Working Papers 8256, National Bureau of Economic Research, Inc.
  7. Gans Joshua S & King Stephen P, 2003. "The Neutrality of Interchange Fees in Payment Systems," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-18, January.
  8. W. Bolt, 2003. "Retail Payments in the Netherlands: some Facts and Some Theory," WO Research Memoranda (discontinued) 722, Netherlands Central Bank, Research Department.
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Cited by:
  1. Evans, David & Schmalensee, Richard, 2005. "The Economics of Interchange Fees and Their Regulation: An Overview," Working papers 18181, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Wilko Bolt & David Humphrey & Roland Uittenbogaard, 2005. "The Effect of Transaction Pricing on the Adoption of Electronic Payments: A Cross-Country Comparison," DNB Working Papers 071, Netherlands Central Bank, Research Department.
  3. Borzekowski, Ron & Kiser, Elizabeth K., 2008. "The choice at the checkout: Quantifying demand across payment instruments," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 889-902, July.
  4. Bergman, Mats A., 2005. "A Welfare Ranking of Two-Sided Market Regimes," Working Paper Series 185, Sveriges Riksbank (Central Bank of Sweden), revised 01 Sep 2005.
  5. Weyl, E. Glen, 2008. "Monopolies in Two-Sided Markets: Comparative Statics and Identification," Department of Economics, Working Paper Series qt69c9c56z, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  6. Wilko Bolt & David Humphrey & Roland Uittenbogaard, 2008. "Transaction Pricing and the Adoption of Electronic Payments: A Cross-Country Comparison," International Journal of Central Banking, International Journal of Central Banking, vol. 4(1), pages 89-123, March.

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