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Cross-Subsidization and Matching Design

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  • Renato Gomes
  • Alessandro Pavan

Abstract

We develop a theory of price discrimination in many-to-many matching markets in which agents’ preferences are vertically and horizontally differentiated. The optimal plans induce negative assortative matching at the margin: agents with a low value for interacting with other agents are included in the matching sets of only those agents from the opposite side whose value for matching is sufficiently high (cross-subsidization). We deliver testable predictions relating the optimal matching plans and price schedules to the distribution of the agents’ preferences and attractiveness. The analysis has implications for the design of business-to-business platforms, advertising, and cable TV packages. JEL Classification Numbers: D82

Suggested Citation

  • Renato Gomes & Alessandro Pavan, 2013. "Cross-Subsidization and Matching Design," Discussion Papers 1559, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1559
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    Cited by:

    1. Lam, W., 2015. "Switching Costs in Two-sided Markets," LIDAM Discussion Papers CORE 2015024, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Amit Basu & Sreekumar Bhaskaran & Rajiv Mukherjee, 2019. "An Analysis of Search and Authentication Strategies for Online Matching Platforms," Management Science, INFORMS, vol. 67(5), pages 2412-2431, May.
    3. Reisinger, Markus, 2014. "Two-part tariff competition between two-sided platforms," European Economic Review, Elsevier, vol. 68(C), pages 168-180.
    4. Renato Gomes, 2014. "Optimal auction design in two-sided markets," RAND Journal of Economics, RAND Corporation, vol. 45(2), pages 248-272, June.

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    More about this item

    Keywords

    Dynamic Voting; Condorcet Winner; Commitment; Condorcet Cycle; Social Experimentation; Status Quo Bias; Social Inefficiency; Social Inertia;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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