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Private Contracts in Two-Sided Markets

Author

Listed:
  • Gaston Llanes

    () (Escuela de Administracion, Pontificia Universidad Catolica de Chile)

  • Francisco Ruiz-Aliseda

    () (Escuela de Administracion, Pontificia Universidad Catolica de Chile)

Abstract

We study a two-sided market in which a platform connects consumers and sellers, and signs private contracts with sellers. We compare this situation with a two-sided market with public contracts. We find that the platform provider sets positive (negative) royalties to sellers and earns a negative (positive) markup on consumers when contracts are private (public). Thus, private contracting has a significant effect on the price structure. Private contracting leads to lower platform profits, consumer surplus, and social welfare. We study the welfare effects of most-favored-nation clauses, price-forcing contracts, and integration with sellers; and relate our results with the agency model of sales. Our results indicate that enhancing the market power of a dominant platform over sellers may increase welfare because it acts as a commitment device for inducing lower seller prices, mitigating the hold-up problem borne by consumers when they cannot observe sellers' contracts.

Suggested Citation

  • Gaston Llanes & Francisco Ruiz-Aliseda, 2015. "Private Contracts in Two-Sided Markets," Working Papers 15-16, NET Institute.
  • Handle: RePEc:net:wpaper:1516
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    File URL: http://www.netinst.org/Llanes_Ruiz-Aliseda_15-16.pdf
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    References listed on IDEAS

    as
    1. E. Glen Weyl, 2010. "A Price Theory of Multi-sided Platforms," American Economic Review, American Economic Association, vol. 100(4), pages 1642-1672, September.
    2. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Two-Sided Markets; Platforms; Vertical Relations; Most-Favored Nation; Price-Forcing Contracts; Resale Price Maintenance; Integration; Agency Model of Sales;

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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