Two-Sided Platforms: Pricing and Social Efficiency

44 Pages Posted: 29 Nov 2004  

Andrei Hagiu

Massachusetts Institute of Technology - Sloan School of Management

Date Written: November 15, 2004

Abstract

This paper models two-sided market platforms, which connect third-party suppliers (developers) of many different products and services to users who demand a variety of these products. From a positive perspective, our model provides a simple explanation for the stark differences in platform pricing structures observed across a range of industries, including software for computers and an increasing number of electronic devices, videogames, digital media, etc. We show that the optimal platform pricing structure shifts towards making a larger share of profits on developers when users have a stronger preference for variety and also when there is uncertainty with respect to the availability, or a limited supply, of third-party (high-quality) products. From a normative perspective, we show that the increasingly popular public policy presumption that open platforms are inherently more efficient than proprietary ones - in terms of induced product diversity, user adoption and total social welfare - is not justified in our framework. The key welfare tradeoff is between the extent to which a proprietary platform internalizes business-stealing, product diversity and indirect network effects and the two-sided deadweight loss it creates through monopoly pricing.

Keywords: Two-Sided Markets, Proprietary Platforms, Open Platforms, Indirect Network Effects

JEL Classification: L12, L21, L22

Suggested Citation

Hagiu, Andrei, Two-Sided Platforms: Pricing and Social Efficiency (November 15, 2004). Available at SSRN: https://ssrn.com/abstract=621461 or http://dx.doi.org/10.2139/ssrn.621461

Andrei Hagiu (Contact Author)

Massachusetts Institute of Technology - Sloan School of Management ( email )

MIT Sloan School of Management
100 Main Street, E62-313
Cambridge, MA 02142
United States
617-715-4844 (Phone)

HOME PAGE: http://andreihagiu.com/

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