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Price Discrimination in Two-Sided Markets

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Abstract

We examine the profitability and the welfare implications of price discrimination in two-sided markets. Platforms have information about the preferences of the agents that allows them to price discriminate within each group. The conventional wisdom from one-sided horizontally differentiated markets is that price discrimination hurts the firms and benefits consumers, prisoners' dilemma. Moreover, it is well-known that the presence of indirect externalities in two-sided markets can intensify the competition. Despite all these, we show that the possibility of price discrimination, in a two-sided market, may actually soften the competition. Therefore, the implications of price discrimination from one-sided markets may not carry over to two-sided markets. This is the case regardless of whether prices are public or private, although private prices boost profits. Our analysis also sheds light on the welfare properties of price discrimination in intermediate goods markets, such as Business-to-Business (B2B) markets.

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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 07-25.

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Length: 34 pages
Date of creation: Sep 2007
Date of revision: Sep 2007
Handle: RePEc:net:wpaper:0725

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Keywords: Price discrimination; Two-sided markets; Indirect network externalities; Market segmentation.;

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  1. Simon P. Anderson & Stephen Coate, 2005. "Market Provision of Broadcasting: A Welfare Analysis," Review of Economic Studies, Oxford University Press, vol. 72(4), pages 947-972.
  2. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
  3. Bester, Helmut & Petrakis, Emmanuel, 1996. "Coupons and oligopolistic price discrimination," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 227-242.
  4. Drew Fudenberg & Jean Tirole, 1999. "Customer Poaching and Brand Switching," Harvard Institute of Economic Research Working Papers 1871, Harvard - Institute of Economic Research.
  5. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-30, March.
  6. Ilya Segal & Michael D. Whinston, 2003. "Robust Predictions for Bilateral Contracting with Externalities," Econometrica, Econometric Society, vol. 71(3), pages 757-791, 05.
  7. David Sibley & Ken Heyer, 2003. "Selected Economic Analysis at the Antitrust Division: The Year in Review," Review of Industrial Organization, Springer, vol. 23(2), pages 95-119, September.
  8. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  9. Konstantinos Serfes & Hyunho Kim, 2004. "A Location Model with Preference for Variety," Econometric Society 2004 North American Summer Meetings 127, Econometric Society.
  10. Kenneth S. Corts, 1998. "Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 306-323, Summer.
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Cited by:
  1. Lapo Filistrucchi & Tobias J. Klein, 2013. "Price Competition in Two-Sided Markets with Heterogeneous Consumers and Network Effects," Working Papers 13-20, NET Institute.
  2. Böhme, Enrico, 2012. "Second-Degree Price Discrimination on Two-Sided Markets," MPRA Paper 40951, University Library of Munich, Germany.
  3. Liu, Qihong & Shuai, Jie, 2013. "Multi-dimensional price discrimination," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 417-428.
  4. Reisinger, Markus, 2014. "Two-part tariff competition between two-sided platforms," European Economic Review, Elsevier, vol. 68(C), pages 168-180.
  5. Reisinger, Markus, 2010. "Unique Equilibrium in Two-Part Tariff Competition between Two-Sided Platforms," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 308, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  6. Hans Jarle Kind & Lars Sørgard, 2013. "Market Segmentation in Two-Sided Markets: TV Rights for Premier League," CESifo Working Paper Series 4060, CESifo Group Munich.
  7. Charles Angelucci & Julia Cage & Romain de Nijs, 2013. "Price Discrimination in a Two-Sided Market: Theory and Evidence from the Newspaper Industry," Working Papers 13-13, NET Institute.

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