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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: https://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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  1. Harrington Jr. , Joseph E., 1995. "Experimentation and Learning in a Differentiated-Products Duopoly," Journal of Economic Theory, Elsevier, vol. 66(1), pages 275-288, June.
  2. Keller, Godfrey & Rady, Sven, 1999. "Optimal Experimentation in a Changing Environment," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 475-507, July.
  3. 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.
  4. Marc Rysman, 2009. "The Economics of Two-Sided Markets," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 125-43, Summer.
  5. Nocke, Volker & Peitz, Martin & Stahl, Konrad, 2004. "Platform Ownership," CEPR Discussion Papers 4657, C.E.P.R. Discussion Papers.
  6. Kaiser, Ulrich & Wright, Julian, 2004. "Price Structure in Two-sided Markets: Evidence from the Magazine Industry?," ZEW Discussion Papers 04-80, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  7. Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers dp409, Financial Markets Group.
  8. repec:cup:cbooks:9780521681599 is not listed on IDEAS
  9. repec:att:wimass:9210 is not listed on IDEAS
  10. Mirman, L.J. & Samuelson, L. & Schlee, E.E., 1991. "Strategic information manipulation in duopolies," Discussion Paper 1991-37, Tilburg University, Center for Economic Research.
  11. Prescott, Edward C, 1972. "The Multi-Period Control Problem Under Uncertainty," Econometrica, Econometric Society, vol. 40(6), pages 1043-58, November.
  12. Marc Rysman, 2004. "Competition Between Networks: A�Study of the Market for Yellow�Pages," Review of Economic Studies, Wiley Blackwell, vol. 71(2), pages 483-512, 04.
  13. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
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