Social Welfare and Cost Recovery in Two-Sided Markets

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. Our result holds for both interior pricing and skewed pricing in two-sided markets. These findings may have interesting consequences for antitrust regulation.

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Two-Sided Markets: Mapping Social Welfare to Gain from Trade

Multi-Agent Systems - Lecture Notes in Computer Science ◽

10.1007/978-3-030-14174-5_8 ◽

2019 ◽

pp. 109-126

Author(s):

Rica Gonen ◽

Ozi Egri

Keyword(s):

Social Welfare ◽

Two Sided Markets

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Cooperative and Noncooperative R&D in Two-Sided Markets

Review of Network Economics ◽

10.1515/rne-2013-0123 ◽

2014 ◽

Vol 13 (2) ◽

Cited By ~ 9

Author(s):

Marc Bourreau ◽

Marianne Verdier

Keyword(s):

Social Welfare ◽

Low Degrees ◽

The Impact ◽

Moderate Magnitude ◽

Two Sided Markets

AbstractIn this paper, we analyze the impact of cooperation on R&D investments in a two-sided market, where platforms compete in quantities. We show that if indirect externalities are of a moderate magnitude, the threshold degree of spillovers above which cooperation spurs R&D investments and enhances social welfare increases with the degree of externalities. If indirect externalities are of a strong magnitude, cooperation can also be beneficial in terms of welfare for low degrees of spillovers.

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Limiting Compatibility in Two-sided Markets

Review of Network Economics ◽

10.2202/1446-9022.1184 ◽

2009 ◽

Vol 8 (4) ◽

Cited By ~ 15

Author(s):

Chun-Hui Miao

Keyword(s):

Social Welfare ◽

Industry Standards ◽

Type Of Behavior ◽

Two Sided Markets

In two-sided markets where the platform is composed of a set of components, a monopolist may have an incentive to foreclose competition in the complementary market. By introducing incompatibility, the monopolist can exclude its complementors, thereby capturing surplus from both sides of customers. This type of behavior lowers social welfare. Private contracts such as a payment for compatibility can help restore efficiency, but its effectiveness depends on the form of the contract. The model's relevance to Microsoft's controversial practice of extending industry standards with proprietary capabilities is discussed.

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