A Price Theory of Multi-Sided Platforms
E. Glen Weyl
Microsoft Research New England; University of Chicago
October 6, 2009
American Economic Review, Forthcoming
I develop a general theory of monopoly pricing of networks. Platforms use insulating tariffs to avoid coordination failure, implementing any desired allocation. Profit-maximization distorts in the spirit of Spence (1975) by internalizing only network externalities to marginal users. Thus the empirical and prescriptive content of the popular Rochet and Tirole (2006) model of two-sided markets turns on the nature of user heterogeneity. I propose a more plausible, yet equally tractable, model of heterogeneity in which users differ in their income or scale. My approach provides a general measure of market power and helps predict the effects of price regulation and mergers.
Number of Pages in PDF File: 40
Keywords: two-sided markets, monopoly quality choice, network effects, multi-product monopoly pricing
JEL Classification: D42, D62, L11, L12, L15, L40, L50
Date posted: January 8, 2009 ; Last revised: September 5, 2012
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