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A Note on Social Welfare and Cost Recovery in Two-Sided Markets

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  • Wilko Bolt
  • Alexander Tieman

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. This causes operational losses for the platform. Our result holds for both interior pricing and skewed pricing in two-sided markets.

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File URL: http://www.dnb.nl/binaries/Working%20Paper%2024_tcm46-146681.pdf
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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 024.

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Date of creation: Dec 2004
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Handle: RePEc:dnb:dnbwpp:024

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Keywords: Two-sided markets; social optimum; cost recovery; operational losses;

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  1. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-22, June.
  2. Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers dp409, Financial Markets Group.
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