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Competition, bargaining power and pricing in two-sided markets

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Author Info
Wilko Bolt
Kimmo Soramäki

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Abstract

We develop a model of two-sided markets that illustrates the role of bargaining power between the two sides of the market. We are interested in the profit maximizing usage fees set by identical duopolistic platforms which engage in homogeneous, Bertrand-type competition. We find that for a sufficiently low marginal cost duopolistic two-sided competition reduces to a “grab-the-dollar” game with two asymmetric (pure) Nash equilibria. These equilibria are characterized by highly skewed prices, in which the side with all the bargaining power pays a minimum price. The other side of the market is used for cross-subsidization and is charged a high price. Compared to the monopoly outcome, competition lowers the total price charged to both sides, although the seller's equilibrium price may exceed the monopoly price. Both platforms enjoy excess profits.Key Words: platform competition, bargaining power, asymmetric equilibria, skewed pricing

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 181.

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Date of creation: Sep 2008
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Handle: RePEc:dnb:dnbwpp:181

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Related research
Keywords: platform competition; bargaining power; asymmetric equilibria; skewed pricing;

Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General

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  1. Jean-Charles Rochet Author-Email: rochet@cict.fr Author-Workplace-Name: IDEI, University of Toulouse & Jean Tirole Author-Email: tirole@cict.fr Author-Workplace-Name: IDEI, University of Toulouse, 2006. "Two-Sided Markets: A Progress Report," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 645-667, Autumn.
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  2. Mark Armstrong & Julian Wright, 2007. "Two-sided Markets, Competitive Bottlenecks and Exclusive Contracts," Economic Theory, Springer, vol. 32(2), pages 353-380, August. [Downloadable!] (restricted)
  3. Laraki, Rida & Solan, Eilon & Vieille, Nicolas, 2005. "Continuous-time games of timing," Journal of Economic Theory, Elsevier, vol. 120(2), pages 206-238, February. [Downloadable!] (restricted)
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  4. Stuart E. Weiner & Julian Wright, 2005. "Interchange fees in various countries: developments and determinants," Payments System Research Working Paper PSR WP 05-01, Federal Reserve Bank of Kansas City. [Downloadable!]
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  5. Mark Armstrong Author-Email: mark.armstrong@ucl.ac.uk, 2006. "Competition in Two-Sided Markets," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 668-691, Autumn.
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  6. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers 152, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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  7. Caillaud, Bernard & Jullien, Bruno, 2003. " Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-28, Summer.
  8. Bolt, Wilko & Tieman, Alexander F., 2008. "Heavily skewed pricing in two-sided markets," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1250-1255, September. [Downloadable!] (restricted)
  9. David S. Evans, 2003. "Some Empirical Aspects of Multi-Sided Platform Industries," Review of Network Economics, Concept Economics, vol. 2(3), pages 191-209, September. [Downloadable!]
  10. Sujit Chakravorti & Roberto Roson, 2006. "Platform Competition in Two-Sided Markets: The Case of Payment Networks," Review of Network Economics, Concept Economics, vol. 5(1), pages 118-143, March. [Downloadable!]
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  11. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Blackwell Publishing, vol. 50(2), pages 103-22, June. [Downloadable!] (restricted)
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  12. Kaiser, Ulrich & Wright, Julian, 2004. "Price Structure in Two-sided Markets : Evidence from the Magazine Industry?," ZEW Discussion Papers 04-80, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
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  13. Andrei Hagiu, 2007. "Merchant or Two-Sided Platform?," Review of Network Economics, Concept Economics, vol. 6(2), pages 115-133, June. [Downloadable!]
  14. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics. [Downloadable!]
  15. Benjamin Hermalin & Michael L. Katz, 2006. "Your Network or Mine? The Economics of Routing Rules," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 692-719, Autumn.
  16. Marius Schwartz & Daniel R. Vincent, 2006. "The No Surcharge Rule and Card User Rebates: Vertical Control by a Payment Network," Review of Network Economics, Concept Economics, vol. 5(1), pages 72-102, March. [Downloadable!]
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