Private Contracts in Two-Sided Markets

Date: 2015-09
By: Gaston Llanes (Escuela de Administracion, Pontificia Universidad Catolica de Chile)
Francisco Ruiz-Aliseda (Escuela de Administracion, Pontificia Universidad Catolica de Chile)
URL: http://d.repec.org/n?u=RePEc:net:wpaper:1516&r=net
We study a two-sided market in which a platform connects consumers and sellers, and signs private contracts with sellers. We compare this situation with a two-sided market with public contracts. We find that the platform provider sets positive (negative) royalties to sellers and earns a negative (positive) markup on consumers when contracts are private (public). Thus, private contracting has a significant effect on the price structure. Private contracting leads to lower platform profits, consumer surplus, and social welfare. We study the welfare effects of most-favored-nation clauses, price-forcing contracts, and integration with sellers; and relate our results with the agency model of sales. Our results indicate that enhancing the market power of a dominant platform over sellers may increase welfare because it acts as a commitment device for inducing lower seller prices, mitigating the hold-up problem borne by consumers when they cannot observe sellers’ contracts.
Keywords: Two-Sided Markets; Platforms; Vertical Relations; Most-Favored Nation; Price-Forcing Contracts; Resale Price Maintenance; Integration; Agency Model of Sales
JEL: L12 L14 L42
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