1 / 14

Two-Sided Markets: Implications for Competition A nalysis

Two-Sided Markets: Implications for Competition A nalysis. Anne Perrot 08 February 2013. Introduction. Topical subject One of the most recent advances in industrial organization Seminal papers by Caillaud and Jullien (2003), Rochet and Tirole (2004)

sancho
Download Presentation

Two-Sided Markets: Implications for Competition A nalysis

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Two-Sided Markets: Implications for Competition Analysis Anne Perrot 08 February 2013

  2. Introduction • Topical subject • One of the most recent advances in industrial organization • Seminal papers by Caillaud and Jullien (2003), Rochetand Tirole (2004) • In connection with the digital economy and the emergence of “platforms” • Allows to better understand the business models of these platforms and the competitive problems associated with them • Many examples: • Media (newspapers, TV…) • Credit cards • Stock exchange and market places • Real estate agencies • Singles clubs • And of course search engines • Specific issues for competition analysis • Relation between prices/costs and pricing problems • Trends towards integration and building-up of big firms

  3. Overview of the presentation • Examples of two-sidedmarkets • Pricing issues • Competitive issues on two-sidedmarkets • Single homing vs. Multi-homing • Costs and benefits of competition on two-sidedmarkets

  4. A classicalexample : the singles clubs • Network externalities • The value of the service depends on the number of users • The club must have women to attract men… • …And men to attractwomen • Eachside of the platformexerts a positive externality over the other one. • But the presence of network effectsis not enough to define a two-sidedmarket • Example: telephone, softwares… • Network effectassociatedwith the number of users : the larger the installed base of users, the higher the utility derivedfrom the use of the telephone, the softwares… • This is a « direct » network effect. • The externalityderivedfrom the two-sided dimension is an « indirect network effect »: one side of the marketexerts an externality over the other one.

  5. Consequences of the « two-sided » dimension • Coordination problem • Both sides have to be present on the platform to make it work • Therefore, in order to trigger the network effect off, it may be necessary to subsidize one side in order to attract the other one. • In a e-commerce platform, subsidize labels to attract buyers, • In the singles club example : subsidize women in order to attract men • This does not mean that women are less costly for the club, • but rather that they generate externalities overthe other side (men) • that benefit the activity of the platform. • This subsidization mechanism induces a disconnection between costs and prices, regardless of any competitive mechanism. • The side whose demand is more elastic and that generates externalities over the other side has to be subsidized.

  6. Manyexamples of that type of indirect network effects • Creditcards: • Twosides = merchants and customers, Platform = payment system (2 banks) => « four-sidedmarket » • Real estateagencies: • Twosides = buyers and sellers, platform = website, physicalagency • Operating systems: • Twosides = users and developpers, platform = operating system • Stock exchange: • Twosides = portfolio managers and issuing agents • Media: • Twosides = readers and advertisers, platform = newspaper, searchengine, TV channel • And of course searchengines • Threesidesat least : internet users, content providers and advertisers.

  7. Consequences for the pricing • Pricescharged to bothsidesmaydiffer • One sidemay face a zeroprice • Or evenmaybepayed in order to participate in the market • This enhances the value of the platform • During the introductoryperiod of the good, pricesmaybeverylow in order to attractusers and make the platform attractive in the future. • A platformwith an installed base mayhold a competitiveadvantage • First moveradvantage • Magnitude of the advantagedepends on the ability to belong to manyplatforms (multi-homing or single-homing) • This mayintensifycompetition in the initial period to attract the installedbase.

  8. Searchengines : pricing issues • A search engine is a multi-sided platform • Internet users, content providers, advertisers • Price structure : • For Internet users, free access. • Content providers can put their content at the disposal of usersat zero price • Advertisers pay for the whole system. • Internet users are attracted by contents • But content providers receive traffic through the search engine • On Google, prices charged to advertisers result from an auction mechanism • In principle, this leads to competitive prices • But Google is able to determine the supply of advertising space: has an impact on prices. • Some content providers (newspapers’ websites) want to receive a payment, due to their positive externality on users

  9. Consequencesfor the pricing • In a two-sidedmarket, the value generated by the platformdepends • On the total pricepayed by bothsides (P = p1+p2) • But also on the pricestructure (p1, p2), thatis, on the split of P betweenbothsides • Examples: fixedfee or use-based unit prices; free subscription … • Allows to separatetwo-sidedmarkets and other types of markets • Retail (simple vertical interaction) • Labor market (relationshipsbetweenemployers and employees in the firm) • … • In these « simple » markets • The price structure does not matter • Negociation and transactions occurbetween the twosidesdirectly

  10. Competitive issues • Manycompetingplatforms: • This situation raisesdifferent issues according to the factthat « multi-homing » or « single-homing » prevails. • Mixed situations (multi-homing on one side, single-homing on the other) are also possible, for example if exclusivitycontracts on one side • Advantages of competition vs. monopoly: depend on manyfeatures. • In the case of single-homing on bothsides : • Eachplatformoffers a restrictedaccess to the otherside • Ex: in an airport, each traveller has onlyaccess to the shops of his terminal, and conversely • Competitionmaybe an unstable situation • Competition or switch to monopoly, depending on • initial conditions, • relative strength of differentiation versus network effects.

  11. Competitive issues : multi-homing on bothsides • This makesbothplatforms (at least partially) substitutes • But multi-homing maybeunstable • If platforms are close substitutes • And if there are fixedsubscriptioncosts • In this case: • Switch to monopolyis possible • Someexclusivitycontractsmaybe pro-competitive (to favourdifferentiation and to preservemutiplicity of platforms) on one side • But not « toomuch » exclusivity • If thereis multi-homing on one side (1), and single-homing on the other (2), then the platformmayobtainhigh profits fromside 1 agents whowant to have access to side 2 agents • Thencompetitionerodes the profits and benefits the agents belonging to the multi-homing side 1.

  12. Searchengines : structural issues • Advantage of first entrant • Helps to build an installed base, triggers the network effect. • Advantage of large size of the engine : multiplicity of contents attractsusers, whoattractadvertising revenues. • Multi-homing on the side of users and of contents providers, but manyexclusivity contrats on the advertisers’ side (whocannotpublish the same ad on twodifferentengines) • Exclusivity + dominance maypreventotherenginesfromdeveloppingtheiractivity • But on the other hand: • spontaneous (structural) trends towards dominance • And exclusivitymaypreservedifferentiationbetweenplatforms and preventthe marketfromswitching to monopoly. • Ambiguouseffects of exclusivity on the competitive structure.

  13. Conclusion • Pricing: usualanalysiscanbeirrelevant • predation, • pricesdriven by costs… • Number of platforms • Withsingle homing, the multiplicity of platformslowers the quality of service (a user on the single homing side 1 cannotinteractwith all the potentialmembers of side 2) • But thisalsoacts as a discipline device on the behavior of platforms and detersfrompricing to high. • Switch to monopoly possible • Withmulti-homing, manyplatformsenhance the quality of service (all members of one sidecaninteractwith all members of the other) • But canbe an unstable situation and lead to monopoly • Exclusivity • Balance betweencompetition « for » the market and « on » the market • Someexclusivitycanbe pro-competitive, toomanyexclusivitycontracts are not.

  14. t • Blablabla • Blabla 2, Square de l’Opéra-Louis-Jouvet F - 75009 Paris 37, Square de Meeûs B-1000 Brussels contact@mapp-economics.com

More Related