Abstract

http://ssrn.com/abstract=1965918
 
 

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Experimentation in Two-Sided Markets


Martin Peitz


University of Mannheim - Department of Economics

Sven Rady


University of Bonn; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Piers Trepper


Ludwig-Maximilians-Universität München

November 2011

CEPR Discussion Paper No. DP8670

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 profi t stream in a continuous-time infi nite-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 strength. If the externality that one side exerts is suffi ciently weaker than the externality it experiences, the optimal fee on this side exceeds the myopically optimal level. We obtain analogous results for expected prices when the platform provider chooses quantities. While the optimal policy does not admit closed-form representations in general, we identify special cases in which the undiscounted limit of the model can be solved in closed form.

Number of Pages in PDF File: 32

Keywords: Bayesian Learning, Monopoly Experimentation, Network Effects, Optimal Control, Two-Sided Market

JEL Classification: D42, D83, L12

working papers series


Date posted: November 29, 2011  

Suggested Citation

Peitz, Martin and Rady, Sven and Trepper, Piers, Experimentation in Two-Sided Markets (November 2011). CEPR Discussion Paper No. DP8670. Available at SSRN: http://ssrn.com/abstract=1965918

Contact Information

Martin Peitz (Contact Author)
University of Mannheim - Department of Economics ( email )
D-68131 Mannheim
Germany
+49 621 181-1835 (Phone)
HOME PAGE: http://peitz.vwl.uni-mannheim.de/
Sven Rady
University of Bonn ( email )
Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
HOME PAGE: http://www.CESifo.de
Piers Trepper
Ludwig-Maximilians-Universität München ( email )
Geschwister-Scholl-Platz 1
Munich, 80539
Germany
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