IO and Competition Policy (Subject) / The economics of multi-sided platforms (Lesson)

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• What is a multi-sided platform? The core business of a multi-sided platform is to provide a common (real or virtual) meeting place and to facilitate interactions between members of different customer groups. It reduces transaction costs and search costs of finding a party to trade or interact with by matchmaking l when on platform there is always a math building audience l platform that allows free usage with advertising minimizing costs l one person organzies the market instead of each one, decrease in search consts Examples : Myspace (Evans) , EBay, Kleiderkreisel, Flea Market, Apple Store, Shopping Mall
• IO and multi-sided platform Platforms play an important role throughout the economy by minimizing transactions costs between entities that can benefit from getting together  Many platform appear and then disappear very fast Pricing and other strategies are strongly affected by the indirect network effects between the different sides of the platform  Profit-maximizing prices may entail below-cost pricing to one set of customers over the LR Many platforms charge one side prices that are below MC or even negative  Why is it important for authorities? - Myspace: antitrust-case - ensure that we are able to take into account future deveopments, type 1 errors intervene much in those markets. Probability of making a mistake is significant and the cost depend on the importance 
• Types of platforms Exchanges (e-bay, dating services, employment agencies, shopping malls) Advertiser-supported media (content is used to attract viewers that are then used to attract advertisers)  Transaction devices (payment card systems) Software platforms (PCs, smartphones, video games, digital music devices) 
• Example: Nighclub A nightclub provides a platform where men and women can meet and search for interactions The club needs to get both men and women on board its platform, ideally in the same proportion  Pricing is one way to get the balance right (reduced entrance fee or free drinks for the underrepresented group)  Customers cannot defeat the price structure through arbitrage (rare)
• Definition proposed by Rochet and Tirole A market is two-sided if the platform can affect the volume of transactions by charging more to one side of the market and reducing the price paid by the other side....the price structure matters and platform must design it so as to bring both sides on board.  Credit Card Company: Can affect the volume of transaction by manipulating the Price Structure Price Structure: Customers are not paying - Shops are paying for the fact that they have a good location
• Conditions for a platform business New theoretical developments (first paper by Rochet and Tirole) Precise results still sensitive to specific assumptions General robust principles requires only • Heterogeneous agents • Positive indirect network effects that customers cannot solve themselves • Agents of one group are better off when the number of agents in the other group ↗ • Insufficient participation of one of the group is hindering trade 
• Results from Markets with a monopoly platform In a market with a single intermediary who charges membership fees, the side of the market that exerts the larger external benefit on the other tends to face lower membership fees. A profit maximizer intermediary may subsidise one side of the market to generate a higher volume of trade and thus profit on the other side of the market. The welfare-maximizing membership fee for an agent on one side of the platform is equal to the cost of providing access to this agent decreased by the external benefit that this agent exerts on agents on the other side of the platform. These fees are lower than the fees a monopoly intermediary would charge.  Lower fees than profit-maximier when indirect network effect
• Assumption: Singlehoming platform markets In a market in which buyers and sellers join either one of two intermediaries, membership fees react more strongly on network effects than in a market with a single intermediary Monopolization and dominance are more likely the stronger the indirect network effects and the more similar the intermediaries are Reason : a lost seller joining the competitor’s platform will make it more difficult to keep the same number of buyers → the membership fee paid by buyers has to be reduced more than in a single intermediary case to keep the number of buyers constant.  more likely to keep dominance one will try to keep number of buyers dominance  more sacrification to keep number of buyers constant
• Networking effects Effekt, bei dem der Nutzen eines Gutes mit steigender Nutzerzahl (i.d.R.) zunimmt (positive Netzwerkeffekte). Solche Effekte treten insbes. bei Internetplattformen auf, z.B. bei Auktionshäusern oder Kontaktforen. Ein anderes Beispiel können Software-Anwendungen sein.
• External benefits Externer Nutzen (externe Ersparnisse, volkswirtschaftliche Ersparnisse) sind solche Vorteile, die Wirtschaftssubjekten zufallen, ohne daß diese den vollen Preis dafür zu entrichten haben.
• Advertisement
• Indirect networking effects Formula U= μ+ϒpi - M U = intrinsic value of being on the side j of the platform pi = number of members connectes on the side j of the platform  y = indirect networj effect felt on side of the platform M = Menbership fee paid to access the side j of the platform
• Difference Singlehoming platform and Multihoming platform: CASE: One seller leaving Shopping center A Singlehoming: value of platform A is decreased because one does not find seller B anymore- Fiercer Competition of Sellers - To convince customers to stay in th location despite the fact that one seller is not available one has to lower the membership fee - Membership fee lower to compensate indirect networking effects more than in the case of multi.homing Multihoming: If customers were already going to A and B (opportunity to multihome) - Generally lower membership fees in multihoming situation as more competition between intermediaries - Networking effects are not as strong - Competition of more sellers
• Examples Facebook Platform Facebook is a platform in which the advertisers value the value of many users (providing) and the users value the service of facebook, the one the advertisors pay for. But facebook is not the only platform available: competitors: Instagram, Twiter Advertisers Users (providing content) Competitors: Instagram, Twitter 
• Singlehoming Examples Communication-industry: users and selers use the same network l pay fee to call pr send a message l interconnection between the networks Earlier: Mobile-industry: only one SIM-Card in one Phone People who are only member on one social network  App Creation as long as it is only availabe for the IOS-Community or ANDROID-Community (Single-Homing for buyers and Sellers). But if one provider produced an app for the other platform, it bcomes a multisided platform BUT:  If more than one side of the market is multi-homing -> The whole market is multi homing.
• Assumptions & Differences in a platform case Platform owner -> Comparable with multi-product firm  No discriminatory pricing -> internalizing indirect networking effect Pricing structure is different from a classic multi-product firm -> Firm will subsidize the other side of the market Different strategies for each player -> buyer and seller
• Examples Multisided platform If one side multihomes, no gain for the other side to multihome as well Multihoming on seller side : media platforms shopping platforms credit cards, OS Multihoming on buyer side : flea markets shopping platforms (in case of sellers signing exclusivity contracts) 
• Conclusions about platforms and merger analysis - nature of multi-sided platform markets affects the forms of competition that can take place on and among platforms - Market definition: Different competitive constrains on both sides - Market Power no indicator for Pricing above MC - Price of a product is adapted to value of the product - Prices may bear little relation to side-specific marginal costs associated to the product - Coordination harder: cartels neet to coordinate on both sides (monitoring, agreement) - Strong indirect network effects favour dominance and monopolization (uncommon: monopolies or nearmonopolies but either several large diferentiated or many small platforms) - Horizontal differentiation is the norm (customers find certain features attractive: multihoming) Assymetric pricing is common (sometimes MC>0) => Optimal Prices depent on the price-sensitivities of demand on both sides - highly price sensitive Complex relationship between Price and Cost Formulas for single-sided markets do not apply
• Determinants of platform size and structure Game: Winner takes it all Indirect network effect (compete for the market, first-mover advantage, indirect NWE ↓ with size of the market) Economies of scale (fixed costs of providing the platform (on one side only) and low marginalization Newspaper - Ads), Diseconomies of scale (facebook harder) Congestion and search optimization (limit size to increase match, can result in transactions, search costs) Platform differentiation (quality levels, explains why sometimes one has a lot of plaftorm: vertical or horizontal => explains multihoming) Multi-Homing
• GUPPI and UPPI in markets with platforms and UPI Assess the price increase for consumers the Advertising side also has to be analyzed -> Advertising side and Readers side UPP = D1,2 AA* ∏2A + D1,2 AA* ∏1A (=increased value for newspaper A)  ∏ = Profitability of Newspaper 1 or 2 D = Diversion Ration  Merger is putting 2 platforms under 1 umbrella each platform has readers and sellers Also: indirect effects due to change of numbers of members when price increases when indirect networking effects are siginificant - lower 
• Single-Homing - the only platform in the market for agents due to resources, contractual restrictions, indivisibilites, exclusivity contracts (TaxI) - Different pricing structure: Lower membership fees than Multihomers Higher risk of loosing a member on one side being forced to compensate the other side of the platform for the decreased value and the lower indirect networking effects -Profit: Subsidize the one who excerts the stronger external benefit / the stronger indirect networking effects on the sides Side of market wit low differentiation  Milk the other Side - Platform owners more interested in single-homing markets (captive customers)
• Types of platforms Exchange (Dating, Emplyment, Auction, B2B Web, Brokers, Financial Institutions, Publishers, Travel service, Ticket Service, eBay) Advertising supported Media (TV, newspapers) Transaction Devices (Payment cards, Cash, Visa, MasterCard) Software Platform (PC: Apple, Microsoft, Palm, Mobile 2.5+ Vodafone, Video Games (liscensing), Digital Music devices)
• Merger ananysis on MSP 1 The link between the customers on the different sides affects εD and thus the extent to which a price increase on either side is profitable 2 The demand on each side becomes very price sensitive when feedback effects work themselves out Competition on both sides of a transaction can limit profits. 3 P = MC (or AVC) is not a relevant benchmark for MSP 
• CASE: Sellers multihome and buyers singlehome If sellers multihome and buyers singlehome, a seller lost is not a seller gained by another platform whilst it is the case for buyers → intermediaries are more concerned about losing buyers because buyers are valuable to extract profit on the seller side Intermediaries compete fiercely for buyers whereas they milk sellers. → low or even negative prices for accessing the platform Lesson 22.9 in Belleflamme and Peitz In a market with competing intermediaries in which sellers can set up shops at both intermediaries, the sellers’ surplus is ignored in the pricing decisions of the intermediary. For any given number of buyers, the intermediary maximises the joint surplus between buyers and the intermediary itself. 

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