Experimentation in Two-Sided Markets

32 Pages Posted: 29 Nov 2011  

Martin Peitz

University of Mannheim - Department of Economics

Sven Rady

University of Bonn

Piers Trepper

Ludwig Maximilian University of Munich

Multiple version iconThere are 3 versions of this paper

Date Written: November 2011

Abstract

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

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

Martin Peitz (Contact Author)

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany
+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
Germany

Piers Trepper

Ludwig Maximilian University of Munich ( email )

Geschwister-Scholl-Platz 1
Munich, Bavaria 80539
Germany

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