Two-Sided Markets, Competitive Bottlenecks and Exclusive Contracts

Posted: 13 Sep 2007

See all articles by Mark Armstrong

Mark Armstrong

University College London - Department of Economics

Julian Wright

National University of Singapore (NUS) - Department of Economics

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Abstract

We provide a framework for analyzing two-sided markets that allows for different degrees of product differentiation on each side of the market. When platforms are viewed as homogenous by sellers but heterogeneous by buyers, we show that competitive bottlenecks arise endogenously. In equilibrium, platforms do not compete directly for sellers, instead choosing to compete indirectly by subsidizing buyers to join. Sellers are left with none of the gains from trade. Despite this, it is sellers who choose to purchase from multiple platforms (multihome). Finally, the role of exclusive contracts to prevent multihoming is explored.

Keywords: Two-sided markets, network externalities, exclusive contracts, competitive bottlenecks

JEL Classification: D43, D62, L13

Suggested Citation

Armstrong, Mark and Wright, Julian, Two-Sided Markets, Competitive Bottlenecks and Exclusive Contracts. Economic Theory, Vol. 32, No. 2, 2007, Available at SSRN: https://ssrn.com/abstract=1014319

Mark Armstrong

University College London - Department of Economics ( email )

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Julian Wright (Contact Author)

National University of Singapore (NUS) - Department of Economics ( email )

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