Upward Pricing Pressure in Two-sided Markets

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  • This article is related to van Damme et al. (2010), a study performed for the Dutch competition authority (NMa). We also appreciate financial support through a Microsoft grant to TILEC, which was provided in accordance with the KNAW Declaration of Scientific Independence. The views expressed here are neither necessarily the ones of the NMa nor of the Microsoft Corporation. We thank Frank Verboven, one anonymous referee and participants in the 2012 CRESSE conference and the 2012 Conference on the Economics of Information and Communication Technologies in Paris for helpful comments.

Abstract

Measuring upward pricing pressure (UPP) has recently been proposed by Farrell and Shapiro (2010) as an alternative screening device for horizontal mergers. We extend the concept of UPP to two-sided markets. Examples of such markets are the newspaper market, where the demand for advertising is related to the number of readers and the market for online search, where advertising demand depends on the number of users. The formulae we derive depend on four sets of diversion ratios that can either be estimated using market-level demand data or elicited in surveys. In an application, we show that it is important to take the two-sidedness of the market into account when evaluating UPP.

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