Two-Sided Markets, Competition and Exclusionary Practices
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School of Business |
Bachelor's thesis
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Authors
Date
2019
Department
Major/Subject
Mcode
Degree programme
Taloustiede
Language
en
Pages
23
Series
Abstract
Markets, where two, or more, groups of agents encounter via intermediary platform and there are network externalities between those groups, can be called two-sided markets. Functioning and key characteristics of two-sided markets are described in this bachelor thesis by presenting three models of initial settings of two-sided markets provided by Armstrong (2006). As Armstrong (2006) suggests the role of i) relative size of cross-group externalities, ii) charging format and iii) agents homing decisions, whether they choose to join a single platform (single-homing) or to join multiple platforms (multi-home) turn out to be crucial in determining market outcomes. There are some limitations in models. Some modifications to account those limitations can be done more easily than others. Right format of charges and costs for platform are clearly case specific. In addition, nonnegativity constraint of prices, fixed costs and agents’ investment cost of joining platform may be considered to be included case by case. More complex questions arise, when source of agents’ decisions about single-homing and multi-homing and source of platforms’ differentiation decisions are considered. Unambiguous answers to these questions may not be reached just by some little modification of parameters. One complex issue is related to feasibility of crucial assumption in competitive bottleneck model, where agents are ‘atomistic’ and do not have market power to affect other group’s decisions by their own decisions. Most importantly it turns out that the format used for determining utility and agent heterogeneity within model are crucial factors in two-sided market models having implications also for endogeneity of agents’ decisions about joining single or multiple platforms. From competition policy point of view, it is useful to pay attention to exclusionary practices, which platforms may have incentive to use to reach dominant position. Existing literature suggests a bit different approaches for assessment of dominance in the context of two-sided markets. Predatory pricing seems even more complicated to detect than in one-sided markets because in two-sided markets price on one side do not reflect only costs incurred from that side but also relative cross-group externalities between groups. Exclusive contracts set by platforms to persuade agents to abandon rival platform may turn around the way, in which total surplus is shared between groups of agents and platform.Description
Thesis advisor
Murto, PauliMustonen, Mikko
Keywords
two-sided markets, platform competition, exclusive contracts, cross-group externalities, indirect network effects, exclusionary practices, platform economics