Platform Pricing in Matching Markets
30 Pages Posted: 3 Jan 2012
Date Written: December 2, 2011
This paper develops a simple model of monopoly platform pricing accounting for two pertinent features of matching markets.
1) The trading process is characterized by search and matching frictions implying limits to positive cross-side network effects and the presence of own-side congestion.
2) Matched agents bargain over the division of the match surplus depending on the qualitative characteristics of both parties. We find that, compared to the frictionless benchmark typically analyzed in the classic platform pricing literature, the harms of monopoly market power are mitigated by frictions. However, when the platform is allowed to make investments in the reduction of frictions, a private platform is likely to under-invest compared to a Pigouvian platform. In addition, accounting for user quality differentiation further reduces classic harms of monopoly market power when user quality types are complements in creation of the match surplus. In this case it is socially desirable to attract smaller groups of users with higher average quality to maximize the aggregate match surplus, resulting in a downward price distortion. This result is reversed when quality types are substitutes and the distortion disappears when they are strategically independent.
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