Price Discrimination in Two-Sided Markets
We would like to thank a coeditor and two referees for very helpful comments and suggestions. We would also like to thank Chris Adams, Christian Ahlin, Marcus Asplund, Luís Cabral, Jay Pil Choi, Bob Hunt, Alessandro Lizzeri, Steven Matusz, Leonard Nakamura and seminar participants at Drexel University, the Federal Reserve Bank of Philadelphia, Michigan State University, the 2008 International Industrial Organization Conference (IIOC), the 2008 NET Institute conference (NYU-Stern), the 2007 European Summer Meeting of the Econometric Society (ESEM), the 2007 Far Eastern Meeting of the Econometric Society (FEMES), the 2007 Society for the Advancement of Economic Theory (SAET) meeting, the 2007 Conference on Research in Economic Theory and Econometrics (CRETE), the 2007 Chinese Economists Society (CES) meeting and the 2007 Eastern Economic Association (EEA) meeting for helpful comments and suggestions. We thank the NET Institute (www.NETinst.org) for financial support.
We examine the profitability and welfare implications of targeted price discrimination (PD) in two-sided markets. First, we show that equilibrium discriminatory prices exhibit novel features relative to discriminatory prices in one-sided models and uniform prices in two-sided models. Second, we compare the profitability of perfect PD, relative to uniform prices in a two-sided market. The conventional wisdom from one-sided horizontally differentiated markets is that PD hurts the firms and benefits consumers, prisoners' dilemma. We show that PD, in a two-sided market, may actually soften the competition. Our results suggest that the conventional advice that PD is good for competition based on one-sided markets may not carry over to two-sided markets.