Private Contracts in Two-Sided Markets

33 Pages Posted: 22 Oct 2015

See all articles by Gastón Llanes

Gastón Llanes

Pontificia Universidad Católica de Chile

Francisco Ruiz-Aliseda

Pontifical Catholic University of Chile

Date Written: October 1, 2015

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

Suggested Citation

Llanes, Gaston and Ruiz-Aliseda, Francisco, Private Contracts in Two-Sided Markets (October 1, 2015). NET Institute Working Paper No. 15-16. Available at SSRN: https://ssrn.com/abstract=2675508 or http://dx.doi.org/10.2139/ssrn.2675508

Gaston Llanes (Contact Author)

Pontificia Universidad Católica de Chile ( email )

Vicuna Mackenna 4860
Santiago
Chile

Francisco Ruiz-Aliseda

Pontifical Catholic University of Chile ( email )

Vicuna Mackenna 4860
Santiago, 99999
Chile

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