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Experimentation in Two-Sided Markets

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

We study optimal experimentation by a monopolistic platform in a two-sided mar- ket. The platform provider faces uncertainty about the strength of the externality each side is exerting on the other. It maximizes the expected present value of its profit stream in a continuous-time infinite-horizon framework by setting participation fees or quantities on both sides. We show that a price-setting platform provider sets a fee lower than the myopically optimal level on at least one side of the market, and on both sides if the two sides are approximately symmetric. If the externality that one side exerts is sufficiently well known and weaker than the externality it experiences, the optimal fee on this side exceeds the myopically optimal level. We obtain analogous results for expected prices when the platform provider chooses quantities. While the optimal pol- icy does not admit closed-form representations in general, we identify special cases in which the undiscounted limit of the model can be solved in closed form.

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File URL: http://ub-madoc.bib.uni-mannheim.de/32932/1/Peitz%2C_Rady%2C_Trepper13%2D03.pdf
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Paper provided by University of Mannheim, Department of Economics in its series Working Papers with number 13-03.

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Date of creation: 2013
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Handle: RePEc:mnh:wpaper:32932
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  2. Keller, R Godfrey & Rady, Sven, 2001. "Price Dispersion and Learning in a Dynamic Differentiated-Goods Duopoly," CEPR Discussion Papers 2919, C.E.P.R. Discussion Papers.
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  5. Godfrey Keller & Sven Rady, 1997. "Optimal Experimentation in a Changing Environment," STICERD - Theoretical Economics Paper Series 333, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  6. Jean-Charles Rochet & Jean Tirole, 2003. "Platform Competition in Two-Sided Markets," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 990-1029, 06.
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  13. Marc Rysman, 2009. "The Economics of Two-Sided Markets," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 125-43, Summer.
  14. Simon P. Anderson & Stephen Coate, 2003. "Market Provision of Broadcasting: A Welfare Analysis," Virginia Economics Online Papers 358, University of Virginia, Department of Economics.
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  16. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  17. Theodore Papageorgiou, 2009. "Learning Your Comparative Advantages," 2009 Meeting Papers 1150, Society for Economic Dynamics.
  18. Alessandro Bonatti, 2011. "Menu Pricing and Learning," American Economic Journal: Microeconomics, American Economic Association, vol. 3(3), pages 124-63, August.
  19. Becker, Gary S & Murphy, Kevin M, 1993. "A Simple Theory of Advertising as a Good or Bad," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 941-64, November.
  20. Marc Rysman, 2004. "Competition Between Networks: A Study of the Market for Yellow Pages," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 483-512.
  21. Felli, Leonardo & Harris, Christopher, 1996. "Learning, Wage Dynamics, and Firm-Specific Human Capital," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 838-68, August.
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