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Experimentation in Two-Sided Markets

Author

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  • Peitz, Martin
  • Rady, Sven
  • Trepper, Piers

Abstract

We study optimal experimentation by a monopolistic platform in a two-sided market. The platform provider is uncertain about the strength of the externality each side is exerting on the other. Setting participation fees on both sides, it gradually learns about these externalities by observing actual participation levels. This provides an informational rationale for introductory pricing, with the platform provider charging a fee below the myopically optimal level on at least one side of the market. If the externality that the other side exerts is sufficiently well known and weaker than the externality it experiences, the platform provider extracts surplus from that side by charging it a fee above the myopically optimal level. This interplay between learning and surplus extraction is crucial to the market outcome and its dynamics.

Suggested Citation

  • Peitz, Martin & Rady, Sven & Trepper, Piers, 2017. "Experimentation in Two-Sided Markets," Munich Reprints in Economics 55039, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:55039
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    Cited by:

    1. Martin Peitz & Sven Rady & Piers Trepper, 2017. "Experimentation in Two-Sided Markets," Journal of the European Economic Association, European Economic Association, vol. 15(1), pages 128-172.
    2. Bruno Jullien & Alessandro Pavan & Marc Rysman, 2021. "Two-sided markets, pricing, and network effects," Post-Print hal-03828345, HAL.
    3. Torsten Heinrich & Claudius Gräbner, 2019. "Beyond equilibrium: revisiting two-sided markets from an agent-based modelling perspective," International Journal of Computational Economics and Econometrics, Inderscience Enterprises Ltd, vol. 9(3), pages 153-180.
    4. Keller, Godfrey & Rady, Sven, 2020. "Undiscounted bandit games," Games and Economic Behavior, Elsevier, vol. 124(C), pages 43-61.
    5. Luís Cabral, 2019. "Towards a theory of platform dynamics," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 28(1), pages 60-72, January.
    6. Bajo-Buenestado, Raúl & Kinateder, Markus, 2019. "Armstrong meets Rochet–Tirole: On the equivalence of different pricing structures in two-sided markets," Economics Letters, Elsevier, vol. 177(C), pages 43-46.

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    More about this item

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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