Social Welfare and Cost Recovery in Two-Sided Markets

Author/Editor:

Wilko Bolt ; Alexander F. Tieman

Publication Date:

October 1, 2005

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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. This causes operational losses for the platform. Our result holds for both interior pricing and skewed pricing in two-sided markets.

Series:

Working Paper No. 05/194

Subject:

English

Publication Date:

October 1, 2005

ISBN/ISSN:

9781451862133/1018-5941

Stock No:

WPIEA2005194

Format:

Paper

Pages:

14

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