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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.

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Bruno Jullien

IDEI and GREMAQ, Toulouse






B2C website


B2B platform



videogame platform

game developers


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"


usage charge

usage charge

+ membership charge


+ membership charge


Some 2SPs and "sellers":


 Exchanges/auctions (eBay, Amazon).

 B2B.

 Employment agencies.

 Dating services.

 Real-estate agencies.

 Futures and securities exchanges


 Telecoms.

 Internet backbone services.

But also...

 Academic journals.

 Shopping malls.

What are two sided markets
What are two-sided markets? and "sellers"

  • Externality: Participants on one side care about the level of participation and usage of the other side

  • Differentiated treatment of each side

  • The profit and the allocation depends on the structure of price not only on the total price.

  • Not all platforms are 2SM

Example: electricity




Bilateral contract

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 and "sellers"

Example 1 : computers / video games

(vertical desintegration)

Hardware producers

Operating system



Example 2 : TV operators


(cinema, sport…)




and "sellers"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.

  • Sell console at or below cost, royalties on games

Often results in very skewed pricing pattern







Access cost

For the moment no transaction fee/ cost

Network size




MONOPOLY PRICES and "sellers"


Volume / margin trade-off

Adjusted margin

Demand elasticity

for fixed participation of the other side

Elasticity = % variation in demand for 1% decrease in price.

  • Example: price to buyers.

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).

  • Comments : and "sellers"

    • The non adjusted margin is lower on the side where the elasticity is the highest and/or the externality created is larger.

    • In some cases prices may be negative (if possible, otherwise gifts, tying…) or null (free newspapers)

    • If one side is captive, the price is higher on this side and smaller on the other side (debit cards).

Sellers and "sellers"

Marquee buyers

Other buyers

Mind the cross-group externalities

 More complex story: within-side externality



large fee (because marquee buyers)

good deal

Illustrations: Amex corporate card.Killer application/game.Key store in shopping mall.

Welfare optimal prices
Welfare: Optimal prices and "sellers"

  • Unrestricted :

  • Price equal to the net opportunity cost

    • → marginal cost net of the value created for the members of the other side

Optimal prices
Optimal prices and "sellers"

  • Budget constraint

  • Ramsey-Boiteux prices depend on elasticity and on externalities (λ is determined by the budget constraint or cost of public funds)

Budget balanced allocation
Budget balanced allocation and "sellers"

  • Ramsey prices with respect to the net opportunity cost

    → marginal cost net of the value created for the members of the other sides

  • Low or negative price if

    • participation generates a relatively higher externality on the other group, and

      ii) the own price demand elasticity is high

Monopoly summary
Monopoly, summary and "sellers"

  • Competitive access (marginal cost pricing) is not efficient

  • One price should be below access cost (if no fixed cost), it may be negative.

  • Similar pattern of price skewness with unregulated monopoly and Ramsey pricing

  • Monopoly may be more efficient than competitive access

    → Optimal market structure?

3 COMPETITION and "sellers"

Variant 1 : single-homing bilateral

Platform 1

  • price smaller on both sides

  • expectations of users play an important role

  • (multiplicity of possible equilibria)

  • "divide and et conquer"

Platform 2



Single-homing and competition and "sellers"

  • Two identical platforms

  • Participants register with only one

  • Competitive benchmark

    • If usages can be fully taxed in a non-distortionary way and negative registration prices are feasible, then in equilibrium

      • Only one platform is active

      • Zero profit

    • But conditions are very restrictive!

  • In general a positive profit equilibrium is possible, unless there is enough homogeneity within sides and coordination between sides

Divide and conquer
Divide and Conquer and "sellers"

  • Divide and conquer strategies

    • Divide: subsidies one side

    • Conquer: charge participation of the other side

  • Competition generates “cross-subsidies”

    • From the high externality group to the low externality

  • There is some scope for positive profit, but much less than in the case of standard network goods uniformly priced

  • Raise dynamic contestability by limiting the ‘first-mover advantage”

Divide and conquer example
Divide and Conquer: example and "sellers"

  • 1 buyer and 1 seller: νB = νS= ν

  • Platform 1 charges pB and pS>0

  • Platform 2 charges:

    • pB - νto buyer and ν to seller

    • Profit pB- cB -cS

  • Eq. prices if small cost (total cost less than ν)

    • pB= pS= cB +cS (if less than ν)

    • Profit = cB +cS

Variant 2 : competitive bottleneck and "sellers"

Platform 1

Platform 2





  • lower prices for buyers

  • higher prices for sellers

Multi-homing and competition and "sellers"

  • Charge « monopoly prices » in multi-homing market High profits on the multi-homing side but dissipation of these profits through to the single-homing side Illustration: advertisers multi-home. Eyeballs don't (and even if they do, rehearsal effect). Subsidy eyeballs

  • Endogeneous MH: Easy to divide but difficult to conquer

  • Limits tipping by facilitating coexistence

4 usage fees
4 and "sellers"USAGE FEES

  • Fees per transaction / interaction

    • One-sided : only one sided is taxed or tax neutrality

    • Two-sided : Non-commercial transaction, restrictive rules (payment cards)

  • Usage fee affects : the probability of “trade”; the net benefits from “trade” (νB, νS ); the platform revenue

  • Balancing fees: set transaction fees to maximize total surplus from trade, use registration fees for coordination / revenue

    • Same limits as for two-part tariffs: heterogeneity, risk aversion, incentive

    • Mature platforms rely more on registration fees

  • Two-sided (no registration fees) : same analysis adjusting for the opportunity cost

Regulation of interactions between end-users and "sellers"

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)

5 competition policy
5 COMPETITION POLICY and "sellers"

  • The issue is the lack of clear benchmark

  • Efficiency is not achieved at price equal marginal cost (or TLIC)

  • Efficiency may require cross-subsidies, or direct subsidy

    • Two violations of anti-trust: “dumping” on one side, excessive price on the other side

Market definition
Market definition and "sellers"

  • Changing the tariff on one side affects the demand and the profit generated on the other side:

    • SNIP test?

    • Estimation of demand elasticity must account for the presence of the other side : due to feedback effects, the elasticity at fixed participation of the other side is not equal to the apparent elasticity

  • One or two markets ?

    • Change the evaluation under dominance criterion

    • Yellow pages , medias : two markets, readers and advertising

    • M2M termination charges: two markets (origination, termination) + regulation of termination (one market should lead to no regulation under EC rules)

    • Credit cards: one market with 2 sides

Price abuse
Price and "sellers"abuse

  • High price-cost margins do not imply market power even if they are low-fixed costs.

  • Competitive cross-subsidy

    • Competition leads to more cross-subsidy

    • Competition leads to more price-discrimination

  • Another efficiency defence for price below costs

  • Predation tests: accounting for both sides→ Measure of “total price”→ Switch to effect based approach?

Tying as coordination device
Tying as coordination device and "sellers"

  • Divide and Conquer strategy

    • Subsidy one side

  • Negative prices may be not feasible

    • Targeted offers

    • Tie a good with registration so that registration has a value even with no participation of the other side.

Indirect network effect
Indirect network effect and "sellers"

Possibility of coordination failure and multiple equilibria:

Solving the problem may require negative prices and price skewness

Competition policy

  • Should we regulate?

    • No clear distortion

    • No clear guidelines for regulation

    • No rational for cost based regulated price

    • Large informational requirement

  • The regulatory response may be worse than the (imperfect) market response

  • Partial regulation (platform neutrality, reciprocal termination charge, …) ?

Some References and "sellers"

Non-technical :

  • Jullien, B (2005): “Pricing and other Business Strategies for e-Procurement Platforms”, IDEI working paper, forthcoming “Handbook of Procurement”

 David Evans (2003) "Some Empirical Aspects of Multi-Sided Platform Industries," Review of Network Economics, 2: 191-209.

  • D. Evans, D. et R. Schmalensee (2005) “The Industrial Organisation of Markets with Two-Sided Paltforms”, NBER working paper.

  • Rochet, J.C. et J. Tirole (2005). "Competition Policy in 2 SMs", mimeo IDEI,forthcoming "Advances in the Economics of Competition Policy".

Some References and "sellers"


  • Rochet, J.C. et J. Tirole(2006) "Two-Sided Markets: A Progress Report", forthcoming, Rand J. Ec.

 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.

  • Rochet, J.C. et J. Tirole(2003) “Paltform Competition in Two-Sided Markets”, Journal of the European Economic Association