Worldwide: The Industrial Organization Of Markets With Two-Sided Platforms

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INTRODUCTION

Many diverse industries are populated by businesses that operate "two-sided platforms." These businesses serve distinct groups of customers who need each other in some way, and the core business of the two-sided platform is to provide a common (real or virtual) meeting place and to facilitate interactions between members of the two distinct customer groups. Two-sided platforms are common in old-economy industries such as those based on advertising-supported media and new-economy industries such as those based on software platforms and web portals. They play an important role throughout the economy by minimizing transactions costs between entities that can benefit from getting together.

In these businesses, pricing and other strategies are strongly affected by the indirect network effects between the two sides of the platform. As a matter of theory, for example, profit-maximizing prices may entail below-cost pricing to one set of customers over the long run and, as a matter of fact, many two-sided platforms charge one side prices that are below marginal cost and are in some cases negative. These and other aspects of two-sided platforms affect almost all aspects of antitrust analysis—from market definition, to the analysis of cartels, single-firm conduct, and efficiencies.¹

This paper provides a brief introduction to the economics of two-sided platforms and the implications for antitrust analysis.

Two-sided platforms were first identified clearly in pioneering work by Jean-Charles Rochet and Jean Tirole, which began circulating in 2001.² A significant theoretical and empirical literature quickly emerged, and the subject has become a very active area of research in economics.³ For the purposes of this paper, it is helpful to clarify some terminology that is used in the economics literature and which sometimes causes confusion. Rochet and Tirole used the term "two-sided markets" to refer to situations in which businesses cater to two interdependent groups of customers. The term "market" was meant loosely and does not refer to how that term is often used in antitrust. This paper refers to "two-sided platforms" but it is synonymous with "two-sided markets" as used in much of the economics literature. How to determine what market a two-sided platform competes in, from an antitrust perspective, is one of the questions considered here.⁴ Two-sided platforms often compete with ordinary (single-sided) firms and sometimes compete on one side with two-sided platforms that serve a different second side.

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David S. Evans is Executive Director of the Jevons Institute for Competition Law and Economics and Visiting Professor, University College London and Lecturer, University of Chicago. Richard Schmalensee is the Howard W. Johnson Professor of Management and Economics at the Massachusetts Institute of Technology (MIT) and Dean, Emeritus, MIT Sloan School of Management, in Cambridge, MA.

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