The Industrial Organization of Markets with Two-Sided Platforms

Abstract

This paper provides an introduction to the economics of two-sided platforms (2SPs) and its application to competition policy issues. 2SPs cater to two or more distinct groups of customers. Members of one customer group need members of the other group for a variety of reasons that we explore. The platform helps these customers get together in many ways and thereby creates value for these customers that they could not readily obtain without the coordination provided by the platform. The courts - with the help of economists and lawyers - have also recognized that certain industries, now understood as based on 2SPs, are governed by unusual economic relationships.

The indirect network effects between customer groups served by a single business are strong in many important industries. Businesses in these industries operate 2SPs. The economics of 2SPs provides insights into how these businesses and industries behave that are relevant for competition analysis including market definition, coordinated practices, and unilateral practices. The economic literature provides robust results - that is, ones that are not dependent on only fragile assumptions - that can assist in this analysis. These results include the consequences of interlinked demand between customer sides for prices; prices do not, contrary to the standard model, have a tight relationship with cost.

As with almost any application of economics to policy several cautions are prudent. First, many of the theoretical results in the literature to date are, like those in other areas of industrial organization, based on quite abstract models of how industries operate and special assumptions of demand and cost. Second, to date there has been little rigorous empirical research on 2SPs or competition among them. Third, the theoretical and empirical work to date suggests that how 2SP businesses work is highly dependent on the specific institutions and technologies of an industry. One must be careful generalizing.

Keywords: Two-sided, platform, 2SP, interchange