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Social Welfare and Cost Recovery in Two-Sided Markets

The Review of Network Economics

Vol. 5, Issue 1 - March 2006, pp 103 - 117

  Wilko Bolt
Research Department, De Nederlandsche Bank
E-mail: [email protected]

Alexander F. Tieman
Monetary and Financial Systems Department, International Monetary Fund

  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.

Keywords: Two-sided market, price structure, externalities, regulation

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