A Price Theory of Multi-Sided Platforms

40 Pages Posted: 8 Jan 2009 Last revised: 5 Sep 2012

E. Glen Weyl

Microsoft Research; Yale University

Date Written: October 6, 2009

Abstract

I develop a general theory of monopoly pricing of networks. Platforms use insulating tariffs to avoid coordination failure, implementing any desired allocation. Profit-maximization distorts in the spirit of Spence (1975) by internalizing only network externalities to marginal users. Thus the empirical and prescriptive content of the popular Rochet and Tirole (2006) model of two-sided markets turns on the nature of user heterogeneity. I propose a more plausible, yet equally tractable, model of heterogeneity in which users differ in their income or scale. My approach provides a general measure of market power and helps predict the effects of price regulation and mergers.

Keywords: two-sided markets, monopoly quality choice, network effects, multi-product monopoly pricing

JEL Classification: D42, D62, L11, L12, L15, L40, L50

Suggested Citation

Weyl, E. Glen, A Price Theory of Multi-Sided Platforms (October 6, 2009). American Economic Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1324415

Eric Glen Weyl (Contact Author)

Microsoft Research ( email )

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HOME PAGE: http://www.glenweyl.com

Yale University ( email )

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