32 Pages Posted: 29 Nov 2011
Date Written: November 2011
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.
Keywords: Bayesian Learning, Monopoly Experimentation, Network Effects, Optimal Control, Two-Sided Market
JEL Classification: D42, D83, L12
Suggested Citation: 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
By Minjae Song
This is a CEPR Discussion Paper. CEPR charges a fee of $5.00 for this paper.Login using your CEPR Personal Profile
File name: DP8670.
If you wish to purchase the right to make copies of this paper for distribution to others, please select the quantity.