Multisided Platforms

SUMMARY

THE ANTITRUST ECONOMICS OF MULTI-SIDED PLATFORMS MARKETS Yale Journal on Regulation; Summer 2003; 20,2, pg 325-381

LUIS G. BOGGIANO

Instituto de Estudios Superiores de Administración (IESA)

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1 This paper summary was prepared as an assignment in the Doctoral Seminar in Strategy by Professor Juan Santalo Mediavilla at Tulane University

Research question

The main research questions are the economic analysis of multisided platforms and its implications for analyzing antitrust and regulatory policies affecting businesses that compete in multi-sided markets.

Multisided platforms coordinate the demands of distinct groups of consumers who need each other in some way. When devising pricing and investment strategies, businesses in multisided platforms must account for the interactions among the demands of multiple groups of customers. In theory, optimal price for one side of the platform does not follow a simple mark-up formula (i.e. the Lerner condition) nor does price follow marginal cost. For example, market definition and market power analysis that focus on a single side of the market will lead to analytical errors since pricing and production decision are based on coordinating the two sides of the market. Pricing in one side of the market may be below average or marginal costs and one may conclude erroneously that pricing is predatory on that side of the market. Thus, the article seeks to explain the unique economic principles that govern pricing and investment in multi-sided markets in an effort to discern efficient regulation of theses businesses.

The hallmark of multisided platforms is that they compete in multisided businesses and therefore must deal with interdependent demand when devising pricing production and investment strategies. Therefore, regulation must take into account this interdependence when analyzing these businesses.

I.A. Necessary conditions for the emergence of Platform Business

(1) There are two or more distinct group of customers.

(2) There are externalities associated with customers A & B becoming connected or coordinated in some fashion

(3) An intermediary is necessary to internalize the externalities created by one group for the other group.

I.B. Types of Multi-Sided Platform Businesses

(1) Market Makers. (i.e., e-Bay, Yahoo Match, etc.)

(2) Audience Makers (i.e., Yellow pages, print media)

(3) Demand Coordinators. (i.e., payment card platforms)

I.C. Multi-sided Versus Single-sided Markets

Existing micro-economic theories based on single-sided markets may not be appropriate to analyze multi-sided markets. For example one side of the business may be charged little or nothing (or even pay) to create demand for the other side of the business. Any economic analysis must consider the implications of externalities created by the network.

I.D. Profit- Maximizing Pricing by Multi-sided Platform Businesses

The platform business faces two demand curves. The optimal price for A depends on the responsiveness of demand to changes in price on A, the responsiveness of demand on B to changes in quality adjusted sales on A and changes on variable cost on both sides. Example of the Rochet-Tirole model for total demand (transactions) for Visa from 1981 to 2001:

Log(transact.) = -8.49 + 1.73 log (merchants) + 0.84 log (cardholders).

Demand increases more proportionately with the number of merchants and less proportionately for the number of cardholders

(1) Pricing by a Multi-sided Platform facing multiplicative demand..

The key result of the economics of multi-sided platform is that the Lerner condition does not hold {(Pt-c)/Pt = 1/ή} where (Pt-c) = margin and ή = elasticity of demand and as a result, the profit maximizing prize of a product does not vary directly with the marginal cost of product.

(2) The pricing Structure and Indirect Externalities

In some cases, decreasing prices on one side of the market will be more than offset by the benefits gained on the other side.

(3) The Relationship between Prices and Costs

Calculations of profits for each side of the business is challenging since allocation of fixed cots must be arbitrary. One must need to consider prices and marginal costs on each side of the business jointly.

(4) Pricing with Platform Competition

Pricing tends to be lower when there

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