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Two-Sided Platforms: Pricing and Social Efficiency

Andrei Hagiu

Harvard Business School - Strategy Unit

November 15, 2004

This paper models two-sided market platforms, which connect third-party suppliers (developers) of many different products and services to users who demand a variety of these products. From a positive perspective, our model provides a simple explanation for the stark differences in platform pricing structures observed across a range of industries, including software for computers and an increasing number of electronic devices, videogames, digital media, etc. We show that the optimal platform pricing structure shifts towards making a larger share of profits on developers when users have a stronger preference for variety and also when there is uncertainty with respect to the availability, or a limited supply, of third-party (high-quality) products. From a normative perspective, we show that the increasingly popular public policy presumption that open platforms are inherently more efficient than proprietary ones - in terms of induced product diversity, user adoption and total social welfare - is not justified in our framework. The key welfare tradeoff is between the extent to which a proprietary platform internalizes business-stealing, product diversity and indirect network effects and the two-sided deadweight loss it creates through monopoly pricing.

Number of Pages in PDF File: 44

Keywords: Two-Sided Markets, Proprietary Platforms, Open Platforms, Indirect Network Effects

JEL Classification: L12, L21, L22

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Date posted: November 29, 2004  

Suggested Citation

Hagiu, Andrei, Two-Sided Platforms: Pricing and Social Efficiency (November 15, 2004). Available at SSRN: http://ssrn.com/abstract=621461 or http://dx.doi.org/10.2139/ssrn.621461

Contact Information

Andrei Hagiu (Contact Author)
Harvard Business School - Strategy Unit ( email )
Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
617-496-6745 (Phone)
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References:  33
Citations:  17

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