Markets with Two-Sided Platforms

Abstract:     
Two-sided platform businesses serve distinct groups of customers and need each other in some way. They provide these customers a real or virtual meeting place, and they facilitate the interactions between members of these customer groups. They essentially act as intermediaries between the two groups and create efficiencies by lowering transactions costs and reducing duplication costs. Many significant industries are populated by businesses based on two-sided platforms. These include many traditional businesses, such as shopping malls, and most Internet-based businesses, such as social networks. Several economic conclusions that are relevant for antitrust analysis follow from the fact that these platforms are maximizing profits based on interlinked demand from the two sides. Prices on one side may be below marginal cost and possibly negative in long-run equilibrium. Many two-sided platforms in practice subsidize one side and earn profits on the other. Moreover, the standard result that the percent markup of price over marginal cost is inversely related to the elasticity of demand does not hold for either customer group. Antitrust analysis, tools, and techniques require modification when two-sided platforms account for a significant portion of supply. Failure to account for the consequences of interlinked demand between the two sides can lead antitrust analysis into serious error.

Number of Pages in PDF File: 27

Keywords: multi-sided platforms, two-sided platforms, two-sided markets, market definition, antitrust, merger analysis, antitrust analysis

JEL Classification: K21, L1, L4

Accepted Paper Series