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Platform pricing in matching markets

  • Maarten GOOS
  • Patrick VAN CAYSEELE
  • Bert WILLEKENS

This paper develops a simple model of monopoly platform pricing accounting for two pertinent features of matching markets. 1) The trading process is characterized by search and matching frictions implying limits to positive cross-side network effects and the presence of own-side congestion. 2)Matched agents bargain over the division of the match surplus depending on the qualitative characteristics of both parties. We find that, compared to the frictionless benchmark typically analyzed in the classic platform pricing literature, the harms of monopoly market power are mitigated by frictions. However, when the platform is allowed to make investments in the reduction of frictions, a private platform is likely to under-invest compared to a Pigouvian platform. In addition, accounting for user quality differentiation further reduces classic harms of monopoly market power when user quality types are complements in creation of the match surplus. In this case it is socially desirable to attract smaller groups of users with higher average quality to maximize the aggregate match surplus, resulting in a downward price distortion. This result is reversed when quality types are substitutes and the distortion disappears when they are strategically independent.

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File URL: http://feb.kuleuven.be/drc/Economics/research/old-dps-papers/Dps11/Dps1132.pdf
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Paper provided by KU Leuven, Faculty of Economics and Business, Department of Economics in its series Working Papers Department of Economics with number ces11.32.

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Date of creation: Dec 2011
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Handle: RePEc:ete:ceswps:ces11.32
Contact details of provider: Web page: http://feb.kuleuven.be/Economics/

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