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Social Welfare and Cost Recovery in Two-Sided Markets

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Author Info
Wilko Bolt () (Research Department, De Nederlandsche Bank)
Alexander F. Tieman (Monetary and Financial Systems Department, International Monetary Fund)

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Abstract

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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Publisher Info
Article provided by Concept Economics in its journal Review of Network Economics.

Volume (Year): 5 (2006)
Issue (Month): 1 (March)
Pages: 103-117
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Handle: RePEc:rne:rneart:v:5:y:2006:i:1:p:103-117

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Related research
Keywords: Two-sided market; price structure; externalities; regulation;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Mark Armstrong Author-Email: mark.armstrong@ucl.ac.uk, 2006. "Competition in Two-Sided Markets," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 668-691, Autumn.
    Other versions:
  2. ROCHET, Jean-Charles & TIROLE, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers 152, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
    Other versions:
  3. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Blackwell Publishing, vol. 50(2), pages 103-22, June. [Downloadable!] (restricted)
    Other versions:
  4. Jean-Charles Rochet, 2003. "The Theory of Interchange Fees: A Synthesis of Recent Contributions," Review of Network Economics, Concept Economics, vol. 2(2), pages 97-124, June. [Downloadable!]
  5. Evans, David & Schmalensee, Richard, 2005. "The Economics of Interchange Fees and Their Regulation: An Overview," Working papers 18181, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
    Other versions:
  6. Benjamin E. Hermalin & Michael L. Katz, 2004. "Sender or Receiver: Who Should Pay to Exchange an Electronic Message?," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 423-447, Autumn.
  7. Sujit Chakravorti & William R. Emmons, 2001. "Who pays for credit cards?," Occasional Paper; Emerging Payments EPS-2001-1, Federal Reserve Bank of Chicago. [Downloadable!]
  8. Julian Wright, 2004. "One-sided Logic in Two-sided Markets," Review of Network Economics, Concept Economics, vol. 3(1), pages 42-63, March. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. D. Kennet & Eric Ralph, 2007. "Efficient interconnection charges and capacity-based pricing," International Economics and Economic Policy, Springer, vol. 4(2), pages 135-158, August. [Downloadable!] (restricted)
  2. Nicole Jonker, 2007. "Payment Instruments as Perceived by Consumers – Results from a Household Survey," De Economist, Springer, vol. 155(3), pages 271-303, September. [Downloadable!] (restricted)
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