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Nonparametric Analysis of Two-Sided Markets

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  • Senay Sokullu

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Abstract

This paper considers an empirical semiparametric model for two-sided markets. Contrary to existing empirical literature on two-sided markets, we do not rely on linear network effects. Instead, network effects and probability distribution functions of net benefits of two sides are specified nonparametrically. The demand functions and the network effect functions of readers and advertisers are estimated by nonparametric IV estimation using a data set from German magazine industry. The ill-posed inverse problem faced during the estimation is solved by Tikhonov Regularization. We show that semiparametric specification is supported by the data and the network effects on readers' side are neither linear nor monotonic. With a numerical illustration we demonstrate that the mark-up of the magazine on readers' side is 27% higher with the nonlinearly specified network effects than in the case with linear network effects.

Suggested Citation

  • Senay Sokullu, 2012. "Nonparametric Analysis of Two-Sided Markets," Bristol Economics Discussion Papers 12/628, Department of Economics, University of Bristol, UK.
  • Handle: RePEc:bri:uobdis:12/628
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    File URL: http://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp12628.pdf
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    References listed on IDEAS

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    1. Frédérique Fève & Jean-Pierre Florens, 2010. "The practice of non-parametric estimation by solving inverse problems: the example of transformation models," Econometrics Journal, Royal Economic Society, vol. 13(3), pages 1-27, October.
    2. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
    3. Elena Argentesi & Lapo Filistrucchi, 2007. "Estimating market power in a two-sided market: The case of newspapers," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(7), pages 1247-1266.
    4. V. Chernozhukov & I. Fernández-Val & A. Galichon, 2009. "Improving point and interval estimators of monotone functions by rearrangement," Biometrika, Biometrika Trust, vol. 96(3), pages 559-575.
    5. Florens, Jean-Pierre & Sokullu, Senay, 2017. "Nonparametric Estimation Of Semiparametric Transformation Models," Econometric Theory, Cambridge University Press, vol. 33(04), pages 839-873, August.
    6. Richard Blundell & Xiaohong Chen & Dennis Kristensen, 2003. "Nonparametric IV estimation of shape-invariant Engel curves," CeMMAP working papers CWP15/03, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    7. D’Haultfoeuille, Xavier, 2011. "On The Completeness Condition In Nonparametric Instrumental Problems," Econometric Theory, Cambridge University Press, vol. 27(03), pages 460-471, June.
    8. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
    9. Victor Chernozhukov & Patrick Gagliardini & Olivier Scaillet, 2006. "Nonparametric Instrumental Variable Estimators of Structural Quantile Effects," Swiss Finance Institute Research Paper Series 08-03, Swiss Finance Institute, revised Aug 2009.
    10. Argentesi, Elena & Ivaldi, Marc, 2005. "Market Definition in the Printed Media Industry: Theory and Practice," CEPR Discussion Papers 5096, C.E.P.R. Discussion Papers.
    11. Flachaire, Emmanuel, 2005. "Bootstrapping heteroskedastic regression models: wild bootstrap vs. pairs bootstrap," Computational Statistics & Data Analysis, Elsevier, vol. 49(2), pages 361-376, April.
    12. Whitney K. Newey & James L. Powell, 2003. "Instrumental Variable Estimation of Nonparametric Models," Econometrica, Econometric Society, vol. 71(5), pages 1565-1578, September.
    13. Stefan Behringer & Lapo Filistrucchi, 2009. "Price Wars in Two-Sided Markets: The case of the UK Quality Newspapers," Working Papers 09-26, NET Institute, revised Dec 2009.
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    Citations

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    Cited by:

    1. Gabriel Garber & Márcio Issao Nakane, 2015. "The Break of Brand Exclusivity in Brazilian Credit Card Acquiring: effects and markup-cost decomposition in a price dispersion setting," Working Papers Series 390, Central Bank of Brazil, Research Department.
    2. Van Keilegom, Ingrid & Vanhems, Anne, 2016. "Estimation of a semiparametric transformation model in the presence of endogeneity," TSE Working Papers 16-654, Toulouse School of Economics (TSE).
    3. repec:bpj:jecome:v:6:y:2017:i:1:p:25:n:5 is not listed on IDEAS
    4. repec:adr:anecst:y:2017:i:128:p:67-108 is not listed on IDEAS
    5. Filistrucchi, L. & Geradin, D.A.A.G. & van Damme, E.E.C., 2012. "Identifying Two-Sided Markets," Discussion Paper 2012-008, Tilburg University, Tilburg Law and Economic Center.
    6. Van Keilegom, Ingrid & Vanhems, Anne, 2011. "Semiparametric transformation model with endogeneity: a control function approach," TSE Working Papers 11-243, Toulouse School of Economics (TSE).
    7. Senay SOKULLU & Sami STOULI, 2017. "Cross-Validation Selection of Regularisation Parameter(s) for Semiparametric Transformation Models," Annals of Economics and Statistics, GENES, pages 67-108.
    8. Centorrino Samuele & Feve Frederique & Florens Jean-Pierre, 2017. "Additive Nonparametric Instrumental Regressions: A Guide to Implementation," Journal of Econometric Methods, De Gruyter, pages 1-25.
    9. Ivaldi, Marc & Sokullu, Senay & Toru, Tuba, 2015. "Airport Prices in a Two-Sided Market Setting: Major US Airports," TSE Working Papers 15-587, Toulouse School of Economics (TSE).

    More about this item

    Keywords

    Two-sided markets; Network externality; Nonparametric IV; Ill-posed inverse problems; Tikhonov Regularization;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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