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Markets with Two-Sided Platforms

27 Pages Posted: 19 Feb 2008 Last revised: 15 Apr 2009

David S. Evans

Global Economics Group; University College London

Richard Schmalensee

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: October 1, 2008

Abstract

Two-sided platform businesses serve distinct groups of customers and need each other in some way. They provide these customers a real or virtual meeting place, and they facilitate the interactions between members of these customer groups. They essentially act as intermediaries between the two groups and create efficiencies by lowering transactions costs and reducing duplication costs. Many significant industries are populated by businesses based on two-sided platforms. These include many traditional businesses, such as shopping malls, and most Internet-based businesses, such as social networks. Several economic conclusions that are relevant for antitrust analysis follow from the fact that these platforms are maximizing profits based on interlinked demand from the two sides. Prices on one side may be below marginal cost and possibly negative in long-run equilibrium. Many two-sided platforms in practice subsidize one side and earn profits on the other. Moreover, the standard result that the percent markup of price over marginal cost is inversely related to the elasticity of demand does not hold for either customer group. Antitrust analysis, tools, and techniques require modification when two-sided platforms account for a significant portion of supply. Failure to account for the consequences of interlinked demand between the two sides can lead antitrust analysis into serious error.

Keywords: multi-sided platforms, two-sided platforms, two-sided markets, market definition, antitrust, merger analysis, antitrust analysis

JEL Classification: K21, L1, L4

Suggested Citation

Evans, David S. and Schmalensee, Richard, Markets with Two-Sided Platforms (October 1, 2008). ISSUES IN COMPETITION LAW AND POLICY (ABA Section of Antitrust Law), Vol. 1, Chapter 28, 2008. Available at SSRN: https://ssrn.com/abstract=1094820

David S. Evans (Contact Author)

Global Economics Group ( email )

111 Devonshire St.
Suite 900
Boston, MA 02108
United States

University College London ( email )

Gower St
London WC1E OEG, WC1E 6BT
United Kingdom

Richard Schmalensee

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Room E62-525
Cambridge, MA 02142
United States
617-253-2957 (Phone)
617-258-6617 (Fax)

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