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Private Contracts in Two-Sided Markets

Author

Listed:
  • Gaston Llanes

    (Escuela de Administracion, Pontificia Universidad Catolica de Chile)

  • Francisco Ruiz-Aliseda

    (Escuela de Administracion, Pontificia Universidad Catolica de Chile)

Abstract

We study a two-sided market in which a platform connects consumers and sellers, and signs private contracts with sellers. We compare this situation with a two-sided market with public contracts. We find that the platform provider sets positive (negative) royalties to sellers and earns a negative (positive) markup on consumers when contracts are private (public). Thus, private contracting has a significant effect on the price structure. Private contracting leads to lower platform profits, consumer surplus, and social welfare. We study the welfare effects of most-favored-nation clauses, price-forcing contracts, and integration with sellers; and relate our results with the agency model of sales. Our results indicate that enhancing the market power of a dominant platform over sellers may increase welfare because it acts as a commitment device for inducing lower seller prices, mitigating the hold-up problem borne by consumers when they cannot observe sellers' contracts.

Suggested Citation

  • Gaston Llanes & Francisco Ruiz-Aliseda, 2015. "Private Contracts in Two-Sided Markets," Working Papers 15-16, NET Institute.
    • Handle: RePEc:net:wpaper:1516
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    References listed on IDEAS

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    More about this item

    Keywords

    Two-Sided Markets; Platforms; Vertical Relations; Most-Favored Nation; Price-Forcing Contracts; Resale Price Maintenance; Integration; Agency Model of Sales;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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