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Competition, bargaining power and pricing in two-sided markets Kimmo Soramäki Helsinki University of Technology www.sorama...
Two-sided markets <ul><li>Rochet-Tirole (2006) define two-sided markets roughly as </li></ul><ul><li>Examples: software pl...
Two-sided Platform vs Merchant <ul><li>Merchant purchases from sellers and resells to consumers </li></ul><ul><li>Platform...
Related literature <ul><li>Surge in literature on 2sms models </li></ul><ul><ul><li>Rochet-Tirole (JEEA 03, RJE 06), Armst...
This paper <ul><li>We develop a usage model of two-sided markets with perfect multi-homing. Bargaining plays a role when m...
<ul><li>Rochet & Tirole (2003) show optimal pricing for monopolistic platform with  only  usage fees: </li></ul><ul><ul><l...
Role of bargaining power <ul><li>When buyers and sellers are willing to transact on several platforms, how is the platform...
The model 1. buyers are willing to transact on a platform if  u b ≥p b   2. if  u b ≥p b 1  and  u b ≥p b 2 , buyers prefe...
<ul><li>Let’s start where platforms 1 and 2 have the same prices </li></ul>Demand - example initially 1 and 2 split this m...
<ul><li>platform 1 reduces buyer´s price and increases seller´s price </li></ul>Demand - example served by 1 if buyer choo...
Demand and profit Profit  (c=marginal cost): Platforms need to evaluate 9 price regions.  Demand :
Best-reply dynamics 45 º starting point: zero profits price demand is split by the two platforms 45 º
Best-reply dynamics 45 º Monopolistic best reply - platform gets monopolistic demand and profits - competitor gets demand ...
Best-reply dynamics 45 º h ε Undercutting phase undercutting by  ε optimal overpricing by h - undercutting other platform’...
Best-reply dynamics 45 º h ε Corner price Undercutting and overpricing continues until corner price is reached. Here platf...
Best-reply dynamics 45 º Two Nash-equilibria &quot;Grab the dollar&quot; - game One of the platforms sets its seller price...
Best-reply dynamics 45 º Best reply to corner price in case of high marginal cost Increase in buyer’s price, but decrease ...
Out-of carrier pricing Undercutting continues below carrier Nash equilibrium exists if a price control exists to the right...
Summary <ul><li>Competition is more complex in two sided markets </li></ul><ul><li>Unequal &quot;bargaining power&quot; ca...
Policy implications for card payments? <ul><li>Perhaps too early, but … </li></ul><ul><li>Highly skewed prices may be an o...
…  and for interchange fees <ul><li>In competitive markets 4-party schemes  should  use the interchange fee to achieve the...
Takk contact me at: kimmo@soramaki.net
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Competition, bargaining power and pricing in two-sided markets

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We argue that skewed pricing found empirically in many two sided markets, can perhaps be explained by which side chooses the platform when both sides are willing to transact on multiple platforms.

Publié dans : Économie & finance, Business
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Competition, bargaining power and pricing in two-sided markets

  1. 1. Competition, bargaining power and pricing in two-sided markets Kimmo Soramäki Helsinki University of Technology www.soramaki.net Wilko Bolt De Nederlandsche Bank Norges Bank Oslo, 24 February 2008
  2. 2. Two-sided markets <ul><li>Rochet-Tirole (2006) define two-sided markets roughly as </li></ul><ul><li>Examples: software platforms, newspapers, shopping malls, payment cards , etc. </li></ul>“ markets where one or several platforms enable interactions between end-users, and try to get the two (or multiple) sides “on board” by appropriately pricing each side”
  3. 3. Two-sided Platform vs Merchant <ul><li>Merchant purchases from sellers and resells to consumers </li></ul><ul><li>Platform enables interactions between sellers and consumers </li></ul>source: Hagiu, A. 2007, Review of Network Economics 6, 115-133
  4. 4. Related literature <ul><li>Surge in literature on 2sms models </li></ul><ul><ul><li>Rochet-Tirole (JEEA 03, RJE 06), Armstrong (RJE 06), Caillaud-Jullien (RJE 03), Chakravorti-Roson (RNE 06), etc </li></ul></ul><ul><li>Models/markets </li></ul><ul><ul><li>membership : buyers and sellers pay a fixed “membership” fee for an uncertain number of future transactions </li></ul></ul><ul><ul><li>usage : buyers and sellers pay a per-transaction fee </li></ul></ul><ul><ul><li>Combination </li></ul></ul><ul><li>Questions… </li></ul><ul><ul><li>Does competition in 2sms lead to lower prices for both sides? </li></ul></ul><ul><ul><li>What is the optimal price structure? </li></ul></ul><ul><ul><li>Does competition lead to convergence to marginal cost level? </li></ul></ul>
  5. 5. This paper <ul><li>We develop a usage model of two-sided markets with perfect multi-homing. Bargaining plays a role when market sides prefer different platforms. </li></ul><ul><li>We are interested in the profit-maximising usage fees set by homogeneous duopolistic platforms. </li></ul><ul><li>We find that for sufficiently low cost level, in Nash-equilibrium all costs are borne by the side without bargaining power. The equilibrium price allows excess profits for both platforms. </li></ul><ul><li>We argue that skewed pricing found empirically in many two sided markets, can perhaps be explained by which side chooses the platform when both sides are willing to transact on multiple platforms. </li></ul>
  6. 6. <ul><li>Rochet & Tirole (2003) show optimal pricing for monopolistic platform with only usage fees: </li></ul><ul><ul><li>Optimal price level (total price) </li></ul></ul><ul><ul><li>Optimal price structure (price ratio) </li></ul></ul><ul><li>Optimal prices </li></ul><ul><ul><li>total price: (p-c)/p=1/ ε </li></ul></ul><ul><ul><li>price structure: p1/p2=ε1/ε2 where p=p1+p2 and ε=ε1+ε2. </li></ul></ul>Recall: Monopolistic Platform
  7. 7. Role of bargaining power <ul><li>When buyers and sellers are willing to transact on several platforms, how is the platform chosen? Both sides may have opposing preferences, depending on the prices </li></ul><ul><li>We investigate the situation where one side chooses the platform </li></ul><ul><ul><li>example: choosing payment instrument at a store -> generally buyer chooses an instrument accepted by the merchant. </li></ul></ul><ul><ul><li>both sides have an order of preference, but are willing to transact on a less preferred platform, instead of foregoing the transaction </li></ul></ul><ul><li>Similar to “routing rules” </li></ul><ul><ul><li>Hermalin-Katz (RJE 06) consider a strategic game of routing rules </li></ul></ul><ul><ul><li>“ if you choose the network and I know you multi-home, I will strategically single-home on my preferred network” </li></ul></ul>
  8. 8. The model 1. buyers are willing to transact on a platform if u b ≥p b 2. if u b ≥p b 1 and u b ≥p b 2 , buyers prefer platform with lower price 3. if u b ≥ p b 1 =p b 2 , half prefer platform 1, and half prefer platform 2 4. the same holds for sellers 5. if buyers and sellers are willing to transact on both platforms, but prefer a different one – choice is determined by bargaining power characterized by τ platform 1 buyers sellers platform 2
  9. 9. <ul><li>Let’s start where platforms 1 and 2 have the same prices </li></ul>Demand - example initially 1 and 2 split this market , , = =
  10. 10. <ul><li>platform 1 reduces buyer´s price and increases seller´s price </li></ul>Demand - example served by 1 if buyer chooses the platform, by 2 if seller chooses the platform served by 2 alone served by 1 alone , ,
  11. 11. Demand and profit Profit (c=marginal cost): Platforms need to evaluate 9 price regions. Demand :
  12. 12. Best-reply dynamics 45 º starting point: zero profits price demand is split by the two platforms 45 º
  13. 13. Best-reply dynamics 45 º Monopolistic best reply - platform gets monopolistic demand and profits - competitor gets demand only from sellers with p s 0 < u s < p s M
  14. 14. Best-reply dynamics 45 º h ε Undercutting phase undercutting by ε optimal overpricing by h - undercutting other platform’s buyer price will get all eligible buyers on board - this allows the platform to increase seller price to a point where the increased margin offsets lost demand
  15. 15. Best-reply dynamics 45 º h ε Corner price Undercutting and overpricing continues until corner price is reached. Here platforms split the demand
  16. 16. Best-reply dynamics 45 º Two Nash-equilibria &quot;Grab the dollar&quot; - game One of the platforms sets its seller price below p s C . Its margin is lower but it has additional demand from sellers with p s C <u s <p s C . The best response to this is p C . The platform with lower seller price has higher profits -> &quot;first mover advantage&quot; c < c*
  17. 17. Best-reply dynamics 45 º Best reply to corner price in case of high marginal cost Increase in buyer’s price, but decrease in seller’s price to level where the platform gets demand from sellers with p s BR <u s <p s C , i.e. seller’s that are not willing to transact on the other platform c > c*
  18. 18. Out-of carrier pricing Undercutting continues below carrier Nash equilibrium exists if a price control exists to the right of the intersection Without price controls undercutting continues until a &quot;flip&quot; in prices is better : no equilibrium c-u s p H p L p M
  19. 19. Summary <ul><li>Competition is more complex in two sided markets </li></ul><ul><li>Unequal &quot;bargaining power&quot; can lead to highly skewed prices </li></ul><ul><li>Generally Nash-equilibrium prices allow excess profits for the platforms </li></ul><ul><li>The results are robust to alternative utility specifications </li></ul><ul><li>Future research on the model will include inter alia </li></ul><ul><ul><li>higher number of platforms </li></ul></ul><ul><ul><li>social welfare considerations </li></ul></ul><ul><ul><li>control of platforms </li></ul></ul><ul><ul><li>membership decision, fixed costs and variable costs </li></ul></ul><ul><ul><li>endogenous bargaining and multi-homing </li></ul></ul>
  20. 20. Policy implications for card payments? <ul><li>Perhaps too early, but … </li></ul><ul><li>Highly skewed prices may be an outcome of competition when one side of the market chooses platform when both sides multi-home </li></ul><ul><li>Restricting end-user prices (e.g. not allowing negative prices) may lead to excess profits to schemes </li></ul><ul><li>Duopolistic competition does not necessarily reduce prices to cost level </li></ul><ul><li>With SEPA and more competition among schemes, prices for retailers should go up… according to the model. </li></ul>
  21. 21. … and for interchange fees <ul><li>In competitive markets 4-party schemes should use the interchange fee to achieve the desired price structure (whatever they tell about cost based interchange fees) </li></ul><ul><li>Highly skewed prices can only be achieved in 4-party schemes by a high interchange fee </li></ul><ul><li>Restricting interchange fees can give a competitive advantage to 3-party schemes (they can undercut more on the buyer side, and compensate it on the seller side). </li></ul>
  22. 22. Takk contact me at: kimmo@soramaki.net

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