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Experimentation in Two-Sided Markets

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

Abstract

We study optimal experimentation by a monopolistic platform in a two-sided market framework. 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 externalities are of approximately equal strenght. If the externality that one side exerts is sufficiently weaker than the externality it experiences, the optimal fee on this side exceeds the myopically optimal level. We obtain analogous results for expected prives when the platform provider chooses quantities. While the optimal policy does not admin closed-form representations in general, we identify special cases in which the undiscounted limit of the model can be solved in closed form.

Suggested Citation

  • Peitz, Martin & Rady, Sven & Trepper, Piers, 2011. "Experimentation in Two-Sided Markets," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 365, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:365
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    References listed on IDEAS

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    1. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, December.
    2. Godfrey Keller & Sven Rady, 1999. "Optimal Experimentation in a Changing Environment," Review of Economic Studies, Oxford University Press, vol. 66(3), pages 475-507.
    3. Kaiser, Ulrich & Wright, Julian, 2006. "Price structure in two-sided markets: Evidence from the magazine industry," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 1-28, January.
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    7. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
    8. Volker Nocke & Martin Peitz & Konrad Stahl, 2007. "Platform Ownership," Journal of the European Economic Association, MIT Press, vol. 5(6), pages 1130-1160, December.
    9. Belleflamme,Paul & Peitz,Martin, 2010. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9780521681599, November.
    10. Marc Rysman, 2009. "The Economics of Two-Sided Markets," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 125-143, Summer.
    11. 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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    Cited by:

    1. Keller, Godfrey & Rady, Sven, 2020. "Undiscounted bandit games," Games and Economic Behavior, Elsevier, vol. 124(C), pages 43-61.
    2. 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

    Keywords

    Two-Sided Market; Network Effects; Monopoly Experimentation; Bayesian Learning; Optimal Control;
    All these keywords.

    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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