Drivers of optimal prices in two-sided markets: the state of the art

In two-sided markets, a platform has two groups of customers and enables their interactions. Demand on one market side depends on demand on the other; therefore, when platforms set prices, they must consider this interdependency and set prices on both sides simultaneously. By surveying the vast theoretical marketing and economics literature, this article provides a clear and systematic overview of profit-maximizing pricing in two-sided markets. It identifies and structures the various drivers of those optimal prices. Using this framework, it summarizes the findings from prior research and offers an assessment of the state of the art with regard to drivers of optimal prices and their impacts on a platform’s price setting. This improves understanding of both the principles of two-sided markets and their optimal pricing. Finally, this state of the art paper suggests some directions for further research.     

Technological platforms

The concept of a platform describes a set of system components that is strongly interdependent with most other system components, and that also co-determines the architecture of the system’s outcome. This concept underlies all kinds of technology-based products, collaborations that produce multi-product systems, and transactions between distinct sets of market participants. In this paper, I provide an overview of the growing scientific literature on technological platforms, and also identify three distinct, but related, literature streams: (1) product platforms; (2) industry platforms; and (3) two-sided markets. In doing so, I focus on empirical studies and mathematical models. For each stream, I then go on to describe the type of platform that the stream relates to, review the stream’s major studies (sorted by key strategic issues), and summarize and synthesize the overall findings before linking them to organizational theory and highlighting some potential gaps for future examination. In closing, I move to a comparison across streams and identify some currently unexplored aspects of the platform concept.     

Technological platforms An assessment of the primary types of technological platforms, their strategic issues and their linkages to organizational theory

The concept of a platform describes a set of system components that is strongly interdependent with most other system components, and that also co-determines the architecture of the system’s outcome. This concept underlies all kinds of technology-based products, collaborations that produce multi-product systems, and transactions between distinct sets of market participants. In this paper, I provide an overview of the growing scientific literature on technological platforms, and also identify three distinct, but related, literature streams: (1) product platforms; (2) industry platforms; and (3) two-sided markets. In doing so, I focus on empirical studies and mathematical models. For each stream, I then go on to describe the type of platform that the stream relates to, review the stream’s major studies (sorted by key strategic issues), and summarize and synthesize the overall findings before linking them to organizational theory and highlighting some potential gaps for future examination. In closing, I move to a comparison across streams and identify some currently unexplored aspects of the platform concept.     

Competing Platforms

Why do competing platforms or networks exist? This paper focuses on instances where the value of a platform depends on the adoption decisions of a small number of firms, and analyzes the strategic competition among platforms to get this oligopolistic side on‐board. I study a bilateral contracting game among platforms and firms that allows for general externalities across both contracting and noncontracting partners, and examine when a market will sustain a single or multiple platforms. When firms can join only one platform, I provide conditions under which market‐tipping and/or market‐splitting equilibria may exist. In particular, even without coordination failure, congestion effects, or firm multihoming, multiple platforms can co‐exist in equilibrium despite being inefficient from the perspective of the contracting parties. Expanding the contracting space to include contingent contracts may exacerbate this inefficiency.     

The importance of consumer multihoming (joint purchases) for market performance: Mergers and entry in media markets

Consumer “multihoming” (watching two TV channels, or buying two news magazines) has surprisingly important effects on market equilibrium and performance in (two‐sided) media markets. We show this by introducing consumer multihoming and advertising finance into the classic circle model of product differentiation. When consumers multihome (attend more than one platform), media platforms can charge only incremental value prices to advertisers. Entry or merger leaves consumer prices unchanged under consumer multihoming, but leaves advertiser prices unchanged under single‐homing: Multihoming flips the side of the market on which platforms compete. In contrast to standard circle results, equilibrium product variety can be insufficient under multihoming.     

Ambiguity in Electoral Competition

The paper proposes an explanation to why electoral competition induces parties to state ambiguous platforms even if voters dislike ambiguity. A platform is ambiguous if different voters may interpret it as different policy proposals. An ambiguous platform puts more or less emphasis on alternative policies so that it is more or less easily interpreted as one policy or the other. I suppose that a party can monitor exactly this platform design but cannot target its communications to individuals one by one. Each individual votes according to her understanding of the parties’ platforms but dislikes ambiguity. It is shown that this electoral competition has no Nash equilibrium. Nevertheless its max–min strategies are the optimal strategies of the Downsian game in mixed strategies. Furthermore, if parties behave prudently enough and if the voters aversion to ambiguity is small enough, these strategies do form an equilibrium.     

How does competition among lodging sharing platforms affect welfare and profits?

We investigate the likely effect on prices, consumer surplus, and profits of intensified competition among peer‐to‐peer lodging platforms. We find that intensified competition in the sharing economy may give rise to some surprising results. For instance, intensified competition may allow platforms to charge higher fees from peer suppliers and lead, therefore, to a decline in consumer surplus. Only if the market of professional hoteliers is highly competitive, intensified competition among platforms leads to the traditional outcome that the entry of more platforms leads to lower fees charged from consumers and to enhanced consumer surplus. We also find that platforms may actually earn higher profits when there is intensified competition among professional hoteliers. In addition, while intensified competition among professional hoteliers leads to a decline in the fees that platforms can charge customers, it may actually result in higher lodging prices. We explain these counterintuitive results by the dual role that the lodging price plays in affecting the welfare of individuals active in the sharing economy. While a higher price has an adverse effect on the welfare of demanders of lodging it benefits peer suppliers of lodging because a higher lodging price raises the compensation they receive when offering lodging capacity to a platform.     

Focality advantage in platform competition

We consider a methodology for studying how beliefs shape platform competition based on the notion of a partial focality. The concept of focality is useful for modeling platform competition when the presence of network effects results in multiple equilibria for a certain set of prices. We illustrate how to implement this methodology in both static and dynamic competition between platforms that differ in their basic quality. The initial degree of focality affects the ability of the high‐quality platform to win the market. Yet, dynamic considerations may have a positive or negative effect on this ability.     

Quotas,Productivity, and Prices: The Case of Anchovy Fishing

I exploit a 2009 reform that introduced individual fishing quotas (catch shares) for Peruvian anchovy—the largest fishery in the world—to assess the causal impact of production quotas on within‐firm productivity and market prices. Unique features of the data allow me to create two alternative counterfactuals: (i) anchovy fishing operations in a region of the country that was mandated to implement quotas with a delay, and (ii) variation in quota allocations across ships. I find that quotas do not increase within‐asset or within‐firm productivity in quantities. Instead, a 200% increase in anchovy prices benefits extraction firms through higher revenues, consistent with two mechanisms enacted by individual fishing quotas: more orderly industry operations reducing excess supply and an increase in bargaining power of extraction firms with respect to fish‐processing. Several market characteristics across geographies differentially affect market prices after the quota regime. Supplementary evidence on fewer operational infractions, higher product quality, and a lower banking delinquency observed during the quota regime suggests the existence of efficiency gains rather than purely rent transfers.     

Platform market competition with endogenous side decisions

This paper develops a framework to analyze platform competition in two‐sided markets in which agents endogenously decide on which side of a platform to join. We characterize the equilibrium pricing structure and perform a comparative statics analysis on how the distribution of agents’ preferences affects the platforms’ profits. We also show that the market equilibrium under profit‐maximizing platforms leads to the first best social surplus, which illustrates the importance of the price mechanism to induce more balanced participation across the two sides. This framework can be applied to analyze market competition for “rental” or “sharing” platforms. In addition, we extend our analysis to consider an initial investment stage, which makes participants the owner of some durable goods to rent out.     

On sellers' cooperation in hybrid marketplaces

Hybrid marketplaces, such as Amazon's and Zalando's stores or Apple's and Google's app stores, which distribute their own products and services in competition with those of third-party sellers, play a significant and growing role in the Internet economy. This paper shows that, other things equal, such platforms would maximize their profits if they lowered the fees charged to sellers and the prices charged to consumers in response to cooperation agreements between third-party sellers: horizontal mergers or collusive agreements. It also shows that such cooperation can be pro-competitive when the platform is a vertically integrated gatekeeper, adopts the agency business model, is a close competitor to the third-party sellers it hosts, and observes (or correctly anticipates) the third-party sellers' agreement. The discussion here is of significant policy relevance, since third-party sellers in online marketplaces may find it easier to collude and may respond to the bargaining power of certain gatekeeper platforms by merging their activities.     

Measuring the diffusion of housing prices across space and over time

How fast and how long (and to what magnitude) does a change in housing prices in one region affect its neighbors? In this paper, I apply a time series technique for measuring impulse response functions from local projections to a spatial autoregressive model of housing prices. For a dynamic panel of California counties, the data reveal that the diffusion of regional housing prices across space lasts up to two and half years. This result, and the econometric techniques employed, should be of interest not only to housing and regional economists, but to a variety of applied econometricians as well. Copyright © 2009 John Wiley & Sons, Ltd.     

National pricing with local quality competition

We study the incentives of national retail chains to adopt national (uniform) prices across local markets that differ in size and competition intensity. In addition to price, the chains may also compete along a quality dimension, and quality is always set locally. We show that absent quality competition, the chains will never use national pricing. However, if quality competition is sufficiently strong there exist equilibria where at least one of the chains adopts national pricing. We also identify cases in which national pricing benefits (harms) all consumers, even in markets where such a pricing strategy leads to higher (lower) prices.     

Wages and prices: Are workers fully compensated for cost of living differences?

This paper investigates the equilibrium relationship between wages and prices across labor markets. Of central interest is the extent to which workers receive higher wages to compensate for differences in the cost of living. According to the spatial equilibrium hypothesis, the utility of homogenous workers should be equal across labor markets. This implies that controlling for amenity differences across areas, the elasticity between wages and the general price level across areas should equal one, at least under certain conditions. I test this hypothesis and find that the predicted relationship holds when housing prices are measured by rents and the general price level is instrumented to account for measurement error. When housing prices are measured by housing values, however, the wage-price elasticity is significantly less than one, even using instrumental variables. Rents reflect the price paid for housing per unit of time and are arguably the superior measure. Thus, findings in this essay provide support for the full compensation hypothesis. These findings also have important implications for researchers estimating the implicit prices of amenities or ranking the quality of life across areas.     

Product Differentiation through Exclusivity: Is there a One‐Market‐Power‐Rent Theorem?

In systems industries, combinations of components are consumed together to generate user benefits. Arrangements among component providers sometimes limit consumers’ ability to mix‐and‐match components, and such exclusive arrangements have been highly controversial. We examine the competitive and welfare effects of exclusive arrangements among system components in a model of relatively differentiated applications that run on relatively undifferentiated platforms. We show that there is no “One‐Market‐Power‐Rent Theorem.” Specifically, exclusive deals with providers of differentiated applications can raise platforms’ margins without reducing applications’ margins, so that overall industry profits rise. Hence, for a given set of components and prices, exclusive arrangements can reduce consumer welfare by limiting consumer choice and raising equilibrium prices. In some cases, however, exclusivity can raise consumer welfare by increasing the equilibrium number of platforms, which leads to lower prices relative to the monopoly outcome that would prevail absent exclusivity.     

The Role of Coordination Bias in Platform Competition

This paper considers platform competition in a two‐sided market that includes buyers and sellers. One of the platforms benefits from a favorable coordination bias in the market, in that for this platform it is less costly than for the other platform to convince customers that the two sides will coordinate on joining it. We find that the degree of the coordination bias affects the platform's decision regarding the business model (i.e., whether to subsidize buyers or sellers), the access fees, and the size of the platform. A slight increase in the coordination bias may induce the advantaged platform to switch from subsidizing sellers to subsidizing buyers, or induce the disadvantaged platform to switch from subsidizing buyers to subsidizing sellers. Moreover, in such a case the advantaged platform switches from oversupplying to undersupplying sellers, and the disadvantaged platform switches from undersupplying to oversupplying sellers.     

快速构建跨平台移动应用开发方案

移动应用产品往往需要考虑多种设备和多个平台的支持,单一平台很难保证应用的覆盖面。但是,从开发的角度而言,多平台之间开发技术的差异,导致开发跨平台原生应用的成本过高。因此,出现了一种中间件的折中方案,它填补Web代码和设备原生代码之间的缺口,并为各个平台生成应用。本文将介绍这种基于Web技术构建的混合型移动应用的开发方案,面向快速开发跨平台移动应用的需求。     

Competition in large markets

This paper evaluates the simplifying assumption that producers compete in a large market without substantial strategic interactions using nonparametric regressions of producers' choices on market size. With such atomistic competition, increasing the number of consumers leaves the distributions of producers' prices and other choices unchanged. In many models featuring non‐trivial strategic considerations, producers' prices fall as their numbers increase. I examine observations of restaurants' sales, seating capacities, exit decisions, and prices from 222 US cities. Given factor prices and demographic variables, increasing a city's size increases restaurants' average sales and decreases their exit rate and prices. These results suggest that strategic considerations lie at the heart of restaurant pricing and turnover. Copyright © 2010 John Wiley & Sons, Ltd.     

Prices and Regional Variation in Welfare

One would expect regional differences in prices to influence conclusions concerning levels and distributions of well-being. Although there is anecdotal evidence of significant price dispersion across regions, there is no governmental source of data that measures differences in price levels. In this paper I integrate estimates of regional prices with expenditure data from the Consumer Expenditure Surveys to assess the influence of price differences on living standards in the United States. While prices have little effect on inequality, estimates of poverty and the standard of living change substantially with the inclusion of regional price variation.     

The role of complementary products on platform adoption: Evidence from the video console market

This paper studies the importance of the interdependences within platform-based markets. Specifically, the work examines the influence of complementary product portfolios on the adoption of platforms by individuals. The study analyzes data from a panel of 17 video game platforms in three regions (the US, Japan and Europe) for the period between 1989 and 2011. The results suggest that platform adoption is driven by the availability and users of complementary products. The study also finds that this impact is stronger when platform providers jointly manage the in-house complementary product portfolio and the platform. These findings reveal that decisions on complementary products act as strategic drivers of adoption in platform-based markets.