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Quality discrimination in online multi-sided markets

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Abstract

The aim of this paper is to explain evidence of unfair practices by online platforms towards business users, particularly SME's. First, using survey data, we show that sellers operating with four different categories of platforms multi-home (marketplaces, app stores, social networks and online advertising). Hence, the appropriate competitive framework is the "competitive bottleneck" model. Second, we develop an empirical model of platform competition adding an additional dimension: service quality. The results indicate that the costs of providing quality to sellers are higher than the costs of providing quality to buyers. These differences may reflect different needs or preferences across groups. While buyers would require simple functionalities sellers would need more sophisticated services. When sellers' multi-home, platforms care more about buyers than sellers and while buyers will get an efficient level of quality, quality to sellers will be "degraded". We argue that this service quality degradation explain unfair trading practices simply because platforms are not willing to invest to take care of sellers.

Suggested Citation

  • Nestor Duch-Brown, 2017. "Quality discrimination in online multi-sided markets," JRC Working Papers on Digital Economy 2017-06, Joint Research Centre (Seville site).
  • Handle: RePEc:ipt:decwpa:2017-06
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    1. Viecens, María Fernanda, 2006. "Two-sided platforms with endogenous quality differentiation," UC3M Working papers. Economics we061204, Universidad Carlos III de Madrid. Departamento de Economía.
    2. Jean‐Charles Rochet & Jean Tirole, 2006. "Two‐sided markets: a progress report," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 645-667, September.
    3. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
    4. Cardell, N. Scott, 1997. "Variance Components Structures for the Extreme-Value and Logistic Distributions with Application to Models of Heterogeneity," Econometric Theory, Cambridge University Press, vol. 13(2), pages 185-213, April.
    5. Ponce, Jorge, 2012. "The quality of credit ratings: A two-sided market perspective," Economic Systems, Elsevier, vol. 36(2), pages 294-306.
    6. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    7. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    8. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
    9. Mark Armstrong & Julian Wright, 2007. "Two-sided Markets, Competitive Bottlenecks and Exclusive Contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 32(2), pages 353-380, August.
    10. Nestor Duch-Brown, 2017. "The competitive landscape of online platforms," JRC Working Papers on Digital Economy 2017-04, Joint Research Centre (Seville site).
    11. Vitor Miguel Ribeiro & João Correia-da-Silva & Joana Resende, 2016. "Nesting Vertical And Horizontal Differentiation In Two-Sided Markets," Bulletin of Economic Research, Wiley Blackwell, vol. 68(S1), pages 133-145, December.
    12. GABSZEWICZ, Jean & WAUTHY, Xavier, 2004. "Two-sided markets and price competition with multi-homing," CORE Discussion Papers 2004030, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    13. Wright Julian, 2004. "One-sided Logic in Two-sided Markets," Review of Network Economics, De Gruyter, vol. 3(1), pages 1-21, March.
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    More about this item

    Keywords

    digital single market; data economy; online platforms; multi-sided markets;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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