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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. 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. repec:reg:rpubli:105 is not listed on IDEAS
  3. Alexander F. Tieman & Wilko Bolt, 2003. "Pricing Debit Card Payment Services," IMF Working Papers 03/202, International Monetary Fund.
  4. Wright, Julian, 2003. "One-Sided Logic in Two-Sided Markets," Working paper 382, Regulation2point0.
  5. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-22, June.
  6. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers 152, Institut d'Économie Industrielle (IDEI), Toulouse.
  7. Roson Roberto, 2005. "Two-Sided Markets: A Tentative Survey," Review of Network Economics, De Gruyter, vol. 4(2), pages 1-19, June.
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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 18181, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. 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.
  3. Nicole Jonker, 2007. "Payment Instruments as Perceived by Consumers – Results from a Household Survey," De Economist, Springer, vol. 155(3), pages 271-303, September.
  4. Jullien, Bruno & Rey, Patrick & Sand-Zantman, Wilfried, 2013. "Termination fees revisited," International Journal of Industrial Organization, 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, vol. 4(2), pages 135-158, August.

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