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Experimentation in Two-Sided Markets

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  • Peitz, Martin
  • Rady, Sven
  • Trepper, Piers

Abstract

We study optimal experimentation by a monopolistic platform in a two-sided market framework. The platform provider faces uncertainty about the strength of the externality each side is exerting on the other. It maximizes the expected present value of its profit stream in a continuous-time infinite-horizon framework by setting participation fees or quantities on both sides. We show that a price-setting platform provider sets a fee lower than the myopically optimal level on at least one side of the market, and on both sides if the two externalities are of approximately equal strenght. If the externality that one side exerts is sufficiently weaker than the externality it experiences, the optimal fee on this side exceeds the myopically optimal level. We obtain analogous results for expected prives when the platform provider chooses quantities. While the optimal policy does not admin closed-form representations in general, we identify special cases in which the undiscounted limit of the model can be solved in closed form.

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Bibliographic Info

Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 365.

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Date of creation: Nov 2011
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Handle: RePEc:trf:wpaper:365

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Keywords: Two-Sided Market; Network Effects; Monopoly Experimentation; Bayesian Learning; Optimal Control;

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  1. Keller, Godfrey & Rady, Sven, 1999. "Optimal Experimentation in a Changing Environment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(3), pages 475-507, July.
  2. Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers, Financial Markets Group dp409, Financial Markets Group.
  3. Nocke, Volker & Peitz, Martin & Stahl, Konrad, 2004. "Platform Ownership," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 16, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. Mirman, L.J. & Samuelson, L. & Schlee, E.E., 1991. "Strategic Information Manupulation in Duopolies," Papers, Tilburg - Center for Economic Research 9137, Tilburg - Center for Economic Research.
  5. Keller, Godfrey & Rady, Sven, 2001. "Price Dispersion and Learning in a Dynamic Differentiated-Goods Duopoly," Discussion Papers in Economics 21, University of Munich, Department of Economics.
  6. Kaiser, Ulrich & Wright, Julian, 2004. "Price Structure in Two-sided Markets: Evidence from the Magazine Industry?," ZEW Discussion Papers 04-80, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  7. Marc Rysman, 2004. "Competition Between Networks: A�Study of the Market for Yellow�Pages," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 71(2), pages 483-512, 04.
  8. Harrington Jr. , Joseph E., 1995. "Experimentation and Learning in a Differentiated-Products Duopoly," Journal of Economic Theory, Elsevier, vol. 66(1), pages 275-288, June.
  9. Prescott, Edward C, 1972. "The Multi-Period Control Problem Under Uncertainty," Econometrica, Econometric Society, Econometric Society, vol. 40(6), pages 1043-58, November.
  10. Marc Rysman, 2009. "The Economics of Two-Sided Markets," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 125-43, Summer.
  11. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
  12. Belleflamme,Paul & Peitz,Martin, 2010. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9780521681599, 9.
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