TWO SIDED MARKETS. Bruno Jullien. IDEI and GREMAQ, Toulouse. ESNIE - CARGESE. GETTING MULTIPLE SIDES ON BOARD. platform. buyers. sellers. B2C website. buyers. B2B platform. suppliers. gam e rs. videogame platform. game developers. "eyeballs". portals, newspapers, TV. advertisers.
TWO SIDED MARKETS
IDEI and GREMAQ, Toulouse
ESNIE - CARGESE
GETTING MULTIPLE SIDES ON BOARD
portals, newspapers, TV
debit & credit cards
Chicken and egg problem. Must get both sides on board/court each side while making money overall.
Organization of lecture
Platform enables or facilitates interaction between "buyers" and "sellers"
+ membership charge
+ membership charge
Exchanges/auctions (eBay, Amazon).
Futures and securities exchanges
Internet backbone services.
Only the total price charged on the two sides matters, as they negotiate
how to share it: similar to tax neutrality
A « classical » industry may become a 2SMs
Example 1 : computers / video games
Example 2 : TV operators
Illustration : Encoding vs. reading
• Adobe Acrobat, Text Processors: free reader, charge or royalties for encoding.
• Contrast: books.
Illustration :why did credit cards and debit cards adopt so markedly different business models?
• Credit (Visa, MasterCard, Amex):high merchant discount, low (negative) cardholder price.
• On-line debit:low merchant discount.
Illustration :Videogame platforms.
Often results in very skewed pricing pattern
2.1 MONOPOLY WITH SUBSCRIPTION
For the moment no transaction fee/ cost
Volume / margin trade-off
for fixed participation of the other side
Elasticity = % variation in demand for 1% decrease in price.
Cost = opportunity cost, smaller than cost incurred in serving buyer
[attracting extra buyers generates revenue on seller side either through usage charges or by being able to increase sellers' membership fees.]
Price will be low/zero/negative if presence of buyer generates substantial revenue on seller side, buyer side reluctant to get on board (elastic demand).
Other examples of skewed pricing patterns:
Mind the cross-group externalities
More complex story: within-side externality
large fee (because marquee buyers)
Illustrations:Amex corporate card.Killer application/game.Key store in shopping mall.
→ marginal cost net of the value created for the members of the other sides
ii) the own price demand elasticity is high
→ Optimal market structure?
Variant 1 : single-homing bilateral
Single-homing and competition
Variant 2 : competitive bottleneck
Multi-homing and competition
Regulation of interactions between end-users
The platform as a competition authority.
2SP performs balancing act through other instruments than membership and usage fees:
The platform as a price regulator.
(illustration: no surcharge for payments with card)
The platform as a licensing/certification authority
(illustrations: exchanges: solvency requirements, prohibition of front-running; dating clubs; Nintendo's mid 80s decision to control quality of third-party games)
The platform as a supplier of information and enforcement.
(illustrations: auto auctions arbitration processes, eBay’s feedback forum)
Possibility of coordination failure and multiple equilibria:
Solving the problem may require negative prices and price skewness
David Evans (2003) "Some Empirical Aspects of Multi-Sided Platform Industries," Review of Network Economics, 2: 191-209.
Armstrong, M. (2006) "Competition in Two-Sided Markets,“ forthcoming, Rand J. Ec.
Jullien, B.(2005) "Two-Sided Markets and Electronic Intermediaries," CESifo Economic Studies, 51.
Caillaud B. et Jullien B. (2003) “Chicken and Egg: Competition between Intermediation Service Provider“, Rand J. Ec., 34.