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Private Contracts in Two-Sided Markets

Listed author(s):
  • Gaston Llanes

    ()

    (Escuela de Administracion, Pontificia Universidad Catolica de Chile)

  • Francisco Ruiz-Aliseda

    ()

    (Escuela de Administracion, Pontificia Universidad Catolica de Chile)

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.

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File URL: http://www.netinst.org/Llanes_Ruiz-Aliseda_15-16.pdf
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Paper provided by NET Institute in its series Working Papers with number 15-16.

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Length: 32 pages
Date of creation: Sep 2015
Handle: RePEc:net:wpaper:1516
Contact details of provider: Web page: http://www.NETinst.org/

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  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, January.
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