One-Sided Access in Two-Sided Markets Marianne Verdier Université de Lille 1, Laboratoire EQUIPPE I acknowledge financial support from FIDES, Forum sur les Institutions, le Droit, l'Economie et la Société, to present at the EARIE (2013) conference. http://fides .u-paris10.fr/ 1
Motivation In two-sided markets, high entry costs (e.g payment systems): cost of building an infrastructure installed base of consumers and merchants… Concern of regulators/competition authorities: ◦ Slow rate of innovation – low degree of competition Alternative solution to platform competition: access. ◦ E.g, mobile phone as an access channel to the payment card infrastructure. 2
The literature on access The foreclosure doctrine: ◦ Terminal Road versus U.S (1912) ◦ An incumbent firm may refuse to an entrant the access to an upstream market (an ‘essential facility’) to preserve its market power on a downstream market. The literature on access in telecommunications industries (one-way access or two-way access): ◦ What is the welfare maximizing level of the access charge? 3
The literature on two-sided markets Platform as intermediaries between two distinct group of users. Role of externalities between the two sides. Main questions of the literature: ◦ What is the profit-maximizing price structure? ◦ How do profit-maximizing prices differ from welfare-maximizing prices? ◦ What is the impact of competition on prices? 4
The literature on entry in platforms Farhi and Hagiu (2008): strategic interactions between an incumbent platform and an entrant platform. Dewenter and Roesch (2012): competition in quantities on two interrelated markets/ free entry equilibrium. Tregouët (2012): studies whether a platform has an incentive to integrate vertically with sellers during the launch phase of a new platform. 5
Research questions 1/ How does the access charge impact the entrant’s incentives to enter the market? => Result 1: a strictly positive access charge may benefit the entrant if it increases seller demand 2/ What is the impact of entry on the price structure? => Result 2: If the degree of product differentiation is low, the price structure is biased in favor of sellers if the platform earns sufficient revenues from the new market. 6
THE MODEL - ASSUMPTIONS 7
The model Extension of Rochet and Tirole (2003) with access: p B p S Platform PF ( c B , c S ) Platform’s Platform’s buyers sellers Access fee per transaction Business stealing Revenues a if competition from access p E Entrant’s Entrant E buyers c E 8
Assumptions Buyers have to decide which channel to use to access the platform’s services. Case 1 - Benchmark: no business stealing. Case 2 - Competition: differentiation between the platform and the entrant. Total demand of buyers: D B ( p B , p E ) = D PF B ( p B , p E ) + D E B ( p B , p E ) 9
Assumptions There are sellers who wish to access D S ( p S ) the platform. Transaction volume on PF: D S ( p S ) D B ( p B , p E ) Fixed entry cost Φ for E. Additional technical assumptions: ◦ Concavity of the platform’s profits ◦ Strategic complementarity of prices on the buyers’ side 10
Timing of the game 1- PF chooses whether to open its infrastructure to E. If PF opens its infrastructure it decides on the level of the access charge a. 2- E decides whether or not to enter the market. 3- If E does not enter, PF operates as a monopoly. If E enters both firms offer their services to buyers and PF offers its services to sellers. 11
A BENCHMARK: NO BUSINESS STEALING 12
Stage 3: choice of prices If there is entry, firms choose the prices that maximize their profits, respectively. The profits are: π PF = D S ( p S )( D B PF ( p B )( p B + p S − c ) + D B E ( p E )( a + p S − c S )) and π E = D S ( p S ) D B E ( p E )( p E − a − c E ) − φ Two externalities: ◦ Entrant to platform (revenues from access) ◦ Platform to entrant (the seller price impacts the transaction volume on the new market) 13
Stage 3: choice of prices The platform’s best-responses: p B + p S − c = 1 PF p B η B PF + D B ! $ PF E E D S ( a + p S − c S ) p B D B & + D B = η B # PF PF p S D B D B η S " % The platform modifies the price structure because it earns profits on the new market through the access fee. The entrant’s best response is to choose the monopoly price. 14
Stage 3: choice of prices Comparison of the prices if there is entry to the monopoly prices: m − c B Proposition 1: If and if there is entry, the a ≤ p B price of buyers decreases and the price of sellers e ( a ) ≤ p B increases: and . e ( a ) ≥ p S m m p S p B The reverse is true if the access charge is higher than the platform’s net benefit of serving consumers under monopoly. Logical result: if it makes losses on the new market, the platform maximizes its profit by increasing the transaction volume on its own market. 15
Stage 3: choice of prices An example with linear demands: PF = 1 − γ B p B E = 1 − δ E p E D S = 1 − γ S p S D B D B c B = c S = c E = 0 γ B = γ S = δ E = 1 e ( a ) = (6 − 2 a − 18 − 24 a + 10 a 2 ) / 6 p B e ( a ) = ( − 3 + 2 a + 18 − 24 a + 10 a 2 ) / 3 p S e ( a ) = (1 + a ) / 2 p E 16
Stage 3: choice of prices Impact of entry on the price structure: Proposition 2: If demands are linear, if and , the platform c B = c S = c E = 0 γ B = γ S charges buyers with a higher price than sellers when it opens its infrastructure if . a > 1/ 3 γ B => Entry on one-side affects the prices on both sides, even if the entrant does not compete with the platform. 17
Comparative statics Impact of the access charge a on the equilibrium prices: 1/ the entrant’s price increases with a. 2/ the platform’s price for sellers varies non- monotonically with a: ◦ If the sensitivity of the entrant’s demand is low, the seller price decreases with a ◦ If the sensitivity of the entrant’s demand and the sensitivity of sellers’ demand are high, the seller price decreases with a for low values of a and then increases with a. 18
Stage 2: entry Stage 2: the entrant enters the market if e ( a ))( p E e ( a ) − a − c E ) − φ ≥ 0 e ( a )) D B E ( p E D S ( p S Impact of the access charge on the entrant’s incentives to enter the market: d π E da = ∂ π E + ∂ π E e dp S ∂ a ∂ p S da P * P * Strategic Direct effect effect (-) (-)*(?) 19
Impact of the access charge on E Direct effect Strategic effect T otal sensitivity of seller Negative Of low magnitude The entrant’s profit demand γ (s) low decreases with a sensitivity of seller Negative If δ (e) high, the The entrant’s profit demand γ (s) high seller price decreases with a Id. (e.g 0.8) decreases with a for high values of for low values of it the access charge. and then increases with a. => Effect negative for high values of a sensitivity of seller Negative If δ (e) low (e.g. The entrant’s profit demand γ (s) high 0.1), the seller price increases with a for Id. (e.g 0.8) decreases with a. low values of it and => Effect positive then decreases with a. 20
Impact of the access charge on E If γ (s) high and δ (e) low, a strictly positive access charge may be needed for the entrant to enter the market. π E − φ a 21
Stage 1: access Stage 1: the platform’s decision to open its infrastructure and the choice of the access fee. Three cases: ◦ a/ blockaded entry ◦ b/ entry accomodation ◦ c/ entry deterrence 22
A benchmark: separate markets b/ Entry accommodation: if it opens its infrastructure, the platform chooses the access price that maximizes its profit: d π PF = ∂ π PF + ∂ π PF e dp E da ∂ a ∂ p E da P * P * Strategic effect Direct effect (-) if the platform earns (+) revenues from the new market 23
An example with linear demands Variation of PF’s Variation of Result profit with a Entrant’s profit with a Maximum at a=1/3 Decreases with a PF profit 4/9 if it If entry cost=0 must accommodates γ S = γ B = δ E = 1 choose a=1 to deter entry (vs. 8/27 entry under monopoly) Increases with a Increases and then Entry γ S = γ B = 1 => Highest access decreases with a accommodation δ E = 0.1 charge that triggers entry Decreases with a Decreases with a Entry γ S = γ B = 0.1 => a=0 accommodation δ E = 0.8 24
The socially optimal access charge The profit- The welfare- maximizing access maximizing access charge charge a=0 a=0 γ S = γ B = 0.1 The PF’s profit is Firms’ profits are decreasing with F decreasing with a, p(b) δ E = 0.8 increases with a, p(s) varies n-m with a The maximum access The maximum access γ S = γ B = 0.8 charge such that the charge such that the δ E = 0.1 entrant enters. entrant enters. The maximum access A lower access charge γ S = γ B = 0.201 charge such that the than the profit- δ E = 0.1 entrant enters. maximizing access charge. 25
COMPETITION BETWEEN THE ENTRANT AND THE PLATFORM ON THE BUYER SIDE 26
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