Intermediation in digital two-sided markets and regulation

Abstract

This thesis is a literature review on intermediation in digital two-sided markets and its regulation. I reviewed consumer search literature, which provided theoretical insights on in what types of market and search environments the interests of platforms acting as intermediaries may be aligned with consumers’ best interests. In addition to consumer search literature, I reviewed theoretical two-sided markets literature. I introduced the monopoly model from Armstrong (2006) and discussed its applicability to the digital context and potential ways to add platforms’ extra rent-seeking intermediation to the model.

There are some market environments in which platforms’ interests are better aligned with those of consumers than in others. The effects on welfare of reductions in search costs may be specific to different types of market environments. The monopoly model of two-sided markets developed by Armstrong (2006) can be extended to the digital context with some reservations, especially about the non-rival nature of interactions between different groups of agents. I graphically demonstrate that the monopoly model is also useful when thinking about a platform’s potential extra rent-seeking intermediation.

The true difficulty in terms of regulation lies in being able to distinguish between consumer welfare enhancing and destroying outcomes of certain types of intermediations. I discuss how sellers’ or producers’ responses to biased intermediation may differ across different types of digital markets. First, their responses may depend on how well they are able to coordinate their actions relative to platforms. Second, their responses may depend on how well they manage to generate products’ interaction-specific within-group externalities in order to gain market power from platforms to influence consumers’ platform adoption decisions.