One-Sided Access in Two-Sided Markets Marianne Verdier Universit - - PowerPoint PPT Presentation

One-Sided Access in Two-Sided Markets

Marianne Verdier Université de Lille 1, Laboratoire EQUIPPE

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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/

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.

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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?

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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?

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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.

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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.

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THE MODEL - ASSUMPTIONS

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The model

Platform PF Platform’s buyers Platform’s sellers

pS pB

Entrant E

pE

Access fee per transaction a

Business stealing if competition

(cB,cS) cE

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Extension of Rochet and Tirole (2003) with access:

Entrant’s buyers

Revenues from access

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:

DB(pB, pE) = DPF

B(pB, pE)+ DE B(pB, pE)

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Assumptions

— There are sellers who wish to access

the platform.

— Transaction volume on PF: — Fixed entry cost Φ for E. — Additional technical assumptions:

• Concavity of the platform’s profits
• Strategic complementarity of prices on the

buyers’ side

DS(pS)

DS(pS)DB(pB, pE)

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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.

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A BENCHMARK: NO BUSINESS STEALING

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Stage 3: choice of prices

— If there is entry, firms choose the prices that

maximize their profits, respectively. The profits are: and

— Two externalities:

• Entrant to platform (revenues from access)
• Platform to entrant (the seller price impacts the

transaction volume on the new market)

π PF = DS(pS)(DB

PF(pB)(pB + pS −c)+ DB E(pE)(a + pS −cS))

π E = DS(pS)DB

E(pE)(pE − a −cE)−φ

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Stage 3: choice of prices

— The platform’s best-responses: — 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.

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pB + pS −c pB = 1 ηB

PF

pB pS = ηB

PF

ηS DB

PF + DB E

DB

PF

! " # $ % &+ DB

EDS(a + pS −cS)

DB

PF

Stage 3: choice of prices

— Comparison of the prices if there is entry to

the monopoly prices:

— Proposition 1: If and if there is entry, the

price of buyers decreases and the price of sellers increases: and .

— 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.

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pB

e (a) ≤ pB m

a ≤ pB

m −cB

pS

e(a) ≥ pS m

Stage 3: choice of prices

— An example with linear demands:

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DB

PF =1−γ BpB

DB

E =1−δE pE

DS =1−γSpS

cB = cS = cE = 0 γ B =γS =δE =1

pB

e (a) = (6 − 2a − 18− 24a +10a2 ) / 6

pS

e(a) = (−3+ 2a + 18− 24a +10a2 ) / 3

pE

e (a) = (1+ a) / 2

Stage 3: choice of prices

— Impact of entry on the price structure: — Proposition 2: If demands are linear, if

and , the platform charges buyers with a higher price than sellers when it opens its infrastructure if .

— => Entry on one-side affects the prices on

both sides, even if the entrant does not compete with the platform.

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cB = cS = cE = 0 γ B =γS a >1/ 3γ B

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.

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Stage 2: entry

— Stage 2: the entrant enters the market if — Impact of the access charge on the entrant’s

incentives to enter the market:

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DS(pS

e(a))DB E(pE e (a))(pE e (a)− a −cE)−φ ≥ 0

dπ E da = ∂π E ∂a

P*

+ ∂π E ∂pS

P*

dpS

e

da

Direct effect (-) Strategic effect (-)*(?)

Impact of the access charge on E

Direct effect Strategic effect T

• tal

sensitivity of seller demand γ(s) low Negative Of low magnitude The entrant’s profit decreases with a sensitivity of seller demand γ(s) high

• Id. (e.g 0.8)

Negative If δ(e) high, the seller price decreases with a for low values of it and then increases with a. => Effect negative for high values of a The entrant’s profit decreases with a for high values of the access charge. sensitivity of seller demand γ(s) high

• Id. (e.g 0.8)

Negative If δ(e) low (e.g. 0.1), the seller price decreases with a. => Effect positive The entrant’s profit increases with a for low values of it and then decreases with a.

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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.

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π E −φ a

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

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A benchmark: separate markets

— b/ Entry accommodation: if it opens its

infrastructure, the platform chooses the access price that maximizes its profit:

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dπ PF da = ∂π PF ∂a

P*

+ ∂π PF ∂pE

P*

dpE

e

da

Direct effect (+) Strategic effect (-) if the platform earns revenues from the new market

An example with linear demands

Variation of PF’s profit with a Variation of Entrant’s profit with a Result Maximum at a=1/3 If entry cost=0 must choose a=1 to deter entry Decreases with a PF profit 4/9 if it accommodates entry (vs. 8/27 under monopoly) Increases with a => Highest access charge that triggers entry Increases and then decreases with a Entry accommodation Decreases with a => a=0 Decreases with a Entry accommodation

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γS =γ B =δE =1 γS =γ B =1

δE = 0.1

γS =γ B = 0.1

δE = 0.8

The socially optimal access charge

The profit- maximizing access charge The welfare- maximizing access charge a=0 The PF’s profit is decreasing with F a=0 Firms’ profits are decreasing with a, p(b) increases with a, p(s) varies n-m with a The maximum access charge such that the entrant enters. The maximum access charge such that the entrant enters. The maximum access charge such that the entrant enters. A lower access charge than the profit- maximizing access charge.

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γS =γ B = 0.1 γS =γ B = 0.8

δE = 0.1

γS =γ B = 0.201

δE = 0.1 δE = 0.8

COMPETITION BETWEEN THE ENTRANT AND THE PLATFORM ON THE BUYER SIDE

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Stage 3: choice of prices

— Three externalities: — 1/ The externality that the platform exerts on

the entrant through the choice of the seller price

— 2/ The externality that the entrant exerts on

the platform’s revenues from access through the choice of its price

— 3/ The competitive externality that the

platform and the entrant exert on each other when they choose their prices for buyers

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Stage 3: illustration

— Following Dixit (1979) & Singh and Vives

(1984), a Bertrand duopoly with differentiated products:

— Parameter b: degree of product differentiation

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DB

PF =1− pB +(1− b)pE

DB

E =1− pE +(1− b)pB

DS =1− pS

Stage 3: impact of entry on the price structure

— Proposition 4: In a Bertrand duopoly setting

with differentiated products on the buyer side…

• Low degree of product differentiation => PF

charges a higher price to buyers than to sellers.

• High degree of product differentiation => PF

charges a higher price to sellers if the access charge is low and a higher price to buyers if the access charge is high.

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Stage 2: entry

— Impact of the access charge on the entrant’s

profit:

— The strategic effect of competition depends

• n the impact of the buyer price on the

entrant’s demand (degree of differentiation)

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dπ E da = ∂π E ∂a

P*

+ ∂π E ∂pS

P*

dpS

e

da + ∂π E ∂pB

P*

dpB

e

da

Direct effect (+) Strategic effect benchmark (?) Strategic effect Competition (+)

Stage 1: access

— Choice of the profit-maximizing access fee: — The indirect effect differs from the

benchmark, because the entrant’s price has a different impact on the platform’s profit:

— This increases the positive impact of the

access charge on the PF’s profit compared to the benchmark.

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∂π PF ∂pE

P*

= DS(pS

e) ∂DB PF

∂pE

P*

(pB

e + pS e −c)+ ∂DB E

∂pE

P*

(a + pS

e −cS)

# $ % % & ' ( (

T erm II (-) T erm I (+)

PERFECT COMPETITION ON THE NEW MARKET

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Perfect competition

• n the new market

— If the entrants are perfectly competitive and

• perate on a separate market segment, we

have:

— The profit-maximizing access charge is equal

to the sum of the platform’s net cost of serving the entrant’s customers and a mark up, which reflects the revenues that the platform can obtain from the access activities:

— Similar to the literature on one-way access.

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pE = a +cE a* = c − pS

e +(pE e /ηE)

Conclusion

— First step to understand a platform’s

incentive to open its infrastructure.

— Other aspects of entry in TSM:

• Entry and investment incentives
• Entry and regulation of prices
• Competition between platforms

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