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Experimentation in Two-Sided Markets

Martin Peitz

University of Mannheim - Department of Economics

Sven Rady

University of Bonn

Piers Trepper

Ludwig Maximilian University of Munich

November 2011

CEPR Discussion Paper No. DP8670

We study optimal experimentation by a monopolistic platform in a two-sided market framework. The platform provider faces uncertainty about the strength of the externality each side is exerting on the other. It maximizes the expected present value of its profi t stream in a continuous-time infi nite-horizon framework by setting participation fees or quantities on both sides. We show that a price-setting platform provider sets a fee lower than the myopically optimal level on at least one side of the market, and on both sides if the two externalities are of approximately equal strength. If the externality that one side exerts is suffi ciently weaker than the externality it experiences, the optimal fee on this side exceeds the myopically optimal level. We obtain analogous results for expected prices when the platform provider chooses quantities. While the optimal policy does not admit closed-form representations in general, we identify special cases in which the undiscounted limit of the model can be solved in closed form.

Number of Pages in PDF File: 32

Keywords: Bayesian Learning, Monopoly Experimentation, Network Effects, Optimal Control, Two-Sided Market

JEL Classification: D42, D83, L12

Date posted: November 29, 2011  

Suggested Citation

Peitz, Martin and Rady, Sven and Trepper, Piers, Experimentation in Two-Sided Markets (November 2011). CEPR Discussion Paper No. DP8670. Available at SSRN: https://ssrn.com/abstract=1965918

Contact Information

Martin Peitz (Contact Author)
University of Mannheim - Department of Economics ( email )
D-68131 Mannheim
+49 621 181-1835 (Phone)
HOME PAGE: http://peitz.vwl.uni-mannheim.de/
Sven Rady
University of Bonn ( email )
Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Piers Trepper
Ludwig Maximilian University of Munich ( email )
Geschwister-Scholl-Platz 1
Munich, Bavaria 80539
Feedback to SSRN

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