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Social Welfare and Cost Recovery in Two-Sided Markets

  • Wilko Bolt
  • Alexander F. Tieman

Using a simple model of two-sided markets, we show that, in the social optimum, platform pricing leads to an inherent cost recovery problem. This result is driven by the positive externality of participation that users on either side of the market exert on the opposite side. The contribution of this positive externality to social welfare leads the social planner to increase users'' participation by setting prices at both sides of the market such that the total price is below marginal cost. This causes operational losses for the platform. Our result holds for both interior pricing and skewed pricing in two-sided markets.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/194.

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Length: 14
Date of creation: 01 Oct 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/194
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  1. Richard Schmalensee, 2001. "Payment Systems and Interchange Fees," NBER Working Papers 8256, National Bureau of Economic Research, Inc.
  2. David S. Evans & Richard Schmalensee, 2005. "The economics of interchange fees and their regulation : an overview," Proceedings – Payments System Research Conferences, Federal Reserve Bank of Kansas City, issue May, pages 73-120.
  3. Roson Roberto, 2005. "Two-Sided Markets: A Tentative Survey," Review of Network Economics, De Gruyter, vol. 4(2), pages 1-19, June.
  4. Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers dp409, Financial Markets Group.
  5. repec:reg:rpubli:105 is not listed on IDEAS
  6. Wright Julian, 2004. "One-sided Logic in Two-sided Markets," Review of Network Economics, De Gruyter, vol. 3(1), pages 1-21, March.
  7. Alexander F. Tieman & Wilko Bolt, 2003. "Pricing Debit Card Payment Services; An IO Approach," IMF Working Papers 03/202, International Monetary Fund.
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