Upward Pricing Pressure in Two-Sided Markets
ESMT European School of Management and Technology
Tilburg University, Department of Economics, CentER & TILEC; University of Florence, Dipartimento di Scienze Economiche
Tobias J. Klein
Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER); Institute for the Study of Labor (IZA); Netspar; Tilburg Law and Economics Center (TILEC)
July 23, 2012
TILEC Discussion Paper No. 2012-029
CentER Discussion Paper Series No. 2012-069
Pricing pressure indices have recently been proposed as alternative screening devices for horizontal mergers involving differentiated products. We extend the concept of Upward Pricing Pressure (UPP) proposed by Farrell and Shapiro (2010) to two-sided markets. Examples of such markets are the newspaper market, where the demand for advertising is related to the number of readers, and the market for online search, where advertising demand depends on the number of users. The formulas we derive are useful for screening mergers among two-sided platforms. Due to the two-sidedness they depend on four sets of diversion ratios that can either be estimated using market-level demand data or elicited in surveys. In an application, we evaluate a hypothetical merger in the Dutch daily newspaper market. Our results indicate that it is important to take the two-sidedness of the market into account when evaluating UPP.
Number of Pages in PDF File: 28
Keywords: merger evaluation, two-sided markets, network effects, UPP
JEL Classification: L13, L40, L82
Date posted: July 23, 2012 ; Last revised: August 29, 2012
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