Skewed Pricing in Two-Sided Markets: An IO approach
AbstractIn 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 InfoPaper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2005 with number 75.
Date of creation: 03 Sep 2005
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Other versions of this item:
- Wilko Bolt & Alexander F. Tieman, 2004. "Skewed Pricing in Two-Sided Markets: An IO approach," DNB Working Papers 013, Netherlands Central Bank, Research Department.
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
- L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-03-05 (All new papers)
- NEP-COM-2006-03-05 (Industrial Competition)
- NEP-MIC-2006-03-05 (Microeconomics)
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