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Two-Sided Platforms: Pricing and Social Efficiency

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  • Andrei Hagiu

Abstract

This paper models two-sided market platforms, which connect third-party suppliers (developers) of many different products and services to users who demand a variety of these products. From a positive perspective, our model provides a simple explanation for the stark differences in platform pricing structures observed across a range of industries, including software for computers and an increasing number of electronic devices, videogames, digital media, etc. We show that the optimal platform pricing structure shifts towards making a larger share of profits on developers when users have a stronger preference for variety and also when there is uncertainty with respect to the availability, or a limited supply, of third-party (high-quality) products. From a normative perspective, we show that the increasingly popular public policy presumption that open platforms are inherently more efficient than proprietary ones -in terms of induced product diversity, user adoption and total social welfare- is not justified in our framework. The key welfare tradeoff is between the extent to which a proprietary platform internalizes business-stealing, product diversity and indirect network effects and the two-sided deadweight loss it creates through monopoly pricing.

Suggested Citation

  • Andrei Hagiu, 2004. "Two-Sided Platforms: Pricing and Social Efficiency," Discussion papers 04035, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:04035
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    References listed on IDEAS

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    3. Andrei Hagiu, 2004. "Two-Sided Platforms: Pricing and Social Efficiency - Extensions," Discussion papers 04036, Research Institute of Economy, Trade and Industry (RIETI).
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    Cited by:

    1. Matthew T. Clements & Hiroshi Ohashi, 2005. "INDIRECT NETWORK EFFECTS AND THE PRODUCT CYCLE: VIDEO GAMES IN THE U.S., 1994-2002 -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 53(4), pages 515-542, December.
    2. Chokri Aloui & Khaïreddine Jebsi, 2010. "Optimal pricing of a two-sided monopoly platform with a one-sided congestion effect," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 57(4), pages 423-439, December.
    3. Bolt, Wilko & Tieman, Alexander F., 2008. "Heavily skewed pricing in two-sided markets," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1250-1255, September.
    4. Yuan, Michael Y., 2008. "The effects of barriers to entry on monopolistic intermediary online services: The case of a digital library," Socio-Economic Planning Sciences, Elsevier, vol. 42(1), pages 56-73, March.
    5. Andrei Hagiu, 2004. "Two-Sided Platforms: Pricing and Social Efficiency - Extensions," Discussion papers 04036, Research Institute of Economy, Trade and Industry (RIETI).

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