Price Discrimination in Two-Sided Markets

Abstract

We examine the profitability and welfare implications of targeted price discrimination in two-sided markets. First, we show that equilibrium discriminatory prices exhibit novel features relative to discriminatory prices in one-sided models and uniform prices in two-sided models. Second, we compare the profitability of perfect price discrimination, relative to uniform prices in a two-sided market. The conventional wisdom from one-sided horizontally differentiated markets is that price discrimination hurts the firms and benefits consumers, prisoners' dilemma. We show that price discrimination, in a two-sided market, may actually soften the competition. Our results suggest that the conventional advice that price discrimination is good for competition based on one-sided markets may not carry over to two-sided markets.

Keywords: Price discrimination, Two-sided markets, Indirect network externalities.

JEL Classification: D43, L13