American Economic Review, Vol. 100, No. 4, pp. 1642-1672, 2010
This paper looks at how competition and prices work for products that serve more than one type of customer.
Competition regulators should be more aggressive in some high-tech markets, holding prices below cost.
- In a two-sided market, the business serves two (or more) different groups of users. Changes affecting one group tend to affect the other group: e.g. Google’s offering service free to consumers increases the number of users and makes the service more valuable to advertisers.
- Subsidies, competition, and price controls tend to reduce the price level, the sum of the prices charged both groups of users. Competition usually results in lower prices to both groups.
- Sometimes, markets are unbalanced: prices decrease for one group (maybe when competition for those users is more intense), giving the two-sided firm less reason to attract the other group, so it raises prices on that side.
- Consumers are better off when prices are below cost, making subsidies desirable. Some users might benefit from paying more so the other group pays less and grows.
- Authorities should be more aggressive in two-sided markets.
- It is always harmful for a firm to raise prices above cost, unlike ordinary markets.
- Two-sided markets can go wrong both in price level and balance, giving regulators more reasons to intervene.