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Social Welfare and Cost Recovery in Two-Sided Markets

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Author Info

  • Wilko Bolt
  • Alexander F. 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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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/194.

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Length: 14
Date of creation: 01 Oct 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/194

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Related research

Keywords: Price structures; Economic models; pricing; social welfare; prices; payment systems; demand functions; density function; credit; welfare function; payment system; payments;

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References

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  1. Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers, Financial Markets Group dp409, Financial Markets Group.
  2. Roson Roberto, 2005. "Two-Sided Markets: A Tentative Survey," Review of Network Economics, De Gruyter, De Gruyter, vol. 4(2), pages 1-19, June.
  3. Wright Julian, 2004. "One-sided Logic in Two-sided Markets," Review of Network Economics, De Gruyter, De Gruyter, vol. 3(1), pages 1-21, March.
  4. repec:reg:wpaper:105 is not listed on IDEAS
  5. Alexander F. Tieman & Wilko Bolt, 2003. "Pricing Debit Card Payment Services," IMF Working Papers 03/202, International Monetary Fund.
  6. repec:reg:rpubli:105 is not listed on IDEAS
  7. 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, Federal Reserve Bank of Kansas City, issue May, pages 73-120.
  8. Richard Schmalensee, 2001. "Payment Systems and Interchange Fees," NBER Working Papers 8256, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Evans, David & Schmalensee, Richard, 2005. "The Economics of Interchange Fees and Their Regulation: An Overview," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 18181, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Nicole Jonker, 2007. "Payment Instruments as Perceived by Consumers – Results from a Household Survey," De Economist, Springer, Springer, vol. 155(3), pages 271-303, September.
  3. Benjamin E. Hermalin & Michael L. Katz, 2011. "Customer or Complementor? Intercarrier Compensation with Two‐Sided Benefits," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 20(2), pages 379-408, 06.
  4. Jullien, Bruno & Rey, Patrick & Sand-Zantman, Wilfried, 2013. "Termination fees revisited," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 31(6), pages 738-750.
  5. D. Kennet & Eric Ralph, 2007. "Efficient interconnection charges and capacity-based pricing," International Economics and Economic Policy, Springer, Springer, vol. 4(2), pages 135-158, August.

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