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)
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

Game of Platforms: Strategic Expansion in Two-Sided Markets

Date: 2013-09
By: Sagit Bar-Gill (Tel Aviv University)
Online platforms, such as Google, Facebook, or Amazon, are constantly expanding their activities, while increasing the overlap in their service offering. In this paper, we study the scope and overlap of online platforms’ activities, when they are endogenously determined. We model an expansion game between two online platforms offering two different services to users for free, while selling user clicks to advertisers. At the outset, each platform offers one service, and users may subscribe to one platform or both (multihoming). In the second stage, each platform decides whether to expand by adding the service already offered by its rival. Platforms’ expansion decisions affect users’ mobility, and thus the partition of users in the market, which, in turn, affects platform prices and profits. We analyze the equilibrium of the expansion game, demonstrating that, in equilibrium, platforms may decide not to expand, even though expansion is costless. Such strategic “no expansion" decisions are due to quantity and price effects of changes in user mobility, brought on by expansion. Both symmetric expansion and symmetric no-expansion equilibria may arise, as well as asymmetric expansion equilibria, even for initially symmetric platforms.
Keywords: Two-sided markets, Platforms, Entry, Online advertising
JEL: L11 L13 L14