Skewed Pricing in Two-Sided Markets: An Io Approach

21 Pages Posted: 10 Feb 2005

See all articles by Wilko Bolt

Wilko Bolt

De Nederlandsche Bank (Dutch Central Bank); VU University Amsterdam

Alexander F. Tieman

International Monetary Fund (IMF)

Date Written: January 2005

Abstract

In two-sided markets, one widely observes skewed pricing strategies, in which the price mark-up is much higher on one side of the market than the other. Using a simple model of two-sided markets, we show that, under constant elasticity of demand, skewed pricing is indeed profit maximizing. The most elastic side of the market is used to generate maximum demand by providing it with platform services at the lowest possible price.

Through the positive network externality, full participation of the high-elasticity, low-price side of the market increases market participation of the other side. As this side is less price elastic, the platform is able to extract high prices. Our skewed pricing result also carries over when analyzing the socially optimal prices. Interestingly, this leads to below-marginal cost pricing in the social optimum. We motivate the analysis by looking at the Dutch debit card system.

Keywords: Two-sided markets, skewed pricing, corner solution, social optimum

JEL Classification: G21, L10, L41

Suggested Citation

Bolt, Wilko and Tieman, Alexander F., Skewed Pricing in Two-Sided Markets: An Io Approach (January 2005). Available at SSRN: https://ssrn.com/abstract=665103 or http://dx.doi.org/10.2139/ssrn.665103

Wilko Bolt (Contact Author)

De Nederlandsche Bank (Dutch Central Bank) ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Alexander F. Tieman

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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