Private Contracts in Two-Sided Markets

Abstract

We study a two-sided market in which a platform connects consumers and sellers, and signs private contracts with sellers. We compare this situation with a two-sided market with public contracts. We find that the platform provider sets positive (negative) royalties to sellers and earns a negative (positive) markup on consumers when contracts are private (public). Thus, private contracting has a significant effect on the price structure. Private contracting leads to lower platform profits, consumer surplus, and social welfare. We study the welfare effects of most favored nation clauses, price-forcing contracts, and integration with sellers; and relate our results with the agency model of sales. Our results indicate that enhancing the market power of a dominant platform over sellers may increase welfare because it acts as a commitment device for inducing lower seller prices, mitigating the hold-up problem borne by consumers when they cannot observe sellers’ contracts.

Keywords: Two-Sided Markets, Platforms, Vertical Relations, Most-Favored Nation, Price-Forcing Contracts, Resale Price Maintenance, Integration, Agency Model of Sales

JEL Classification: L12, L14, L42