Social Welfare and Cost Recovery in Two-Sided Markets

14 Pages Posted: 3 Mar 2006

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: October 2005

Abstract

Using a simple model of two-sided markets, we show that, in the social optimum, platform pricing leads to an inherent cost recovery problem. This result is driven by the positive externality of participation that users on either side of the market exert on the opposite side. The contribution of this positive externality to social welfare leads the social planner to increase users` participation by setting prices at both sides of the market such that the total price is below marginal cost. This causes operational losses for the platform. Our result holds for both interior pricing and skewed pricing in two-sided markets.

Keywords: Two-sided markets, social optimum, cost recovery, operational losses

JEL Classification: G21, L10, L41

Suggested Citation

Bolt, Wilko and Tieman, Alexander F., Social Welfare and Cost Recovery in Two-Sided Markets (October 2005). IMF Working Paper, Vol. , pp. 1-14, 2005. Available at SSRN: https://ssrn.com/abstract=888063

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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