R. Schmalensee - The industrial organization in markets with two sided platforms, Sintesi del corso di Economia

Scarica R. Schmalensee - The industrial organization in markets with two sided platforms e più Sintesi del corso in PDF di Economia solo su Docsity! David S. Evans & Richard Schmalensee – The industrial organization of markets with two-sided platforms Introduction Many diverse industries are populated by businesses that operate “two-sided platforms.” These businesses serve distinct groups of customers who need each other in some way, and the core business of the two-sided platform is to provide a common (real or virtual) meeting place and to facilitate interactions between members of the two distinct customer groups. Two-sided platforms are common in old-economy industries such as those based on advertising-supported media and new-economy industries such as those based on software platforms and web portals. They play an important role throughout the economy by minimizing transactions costs between entities that can benefit from getting together. In these businesses, pricing and other strategies are strongly affected by the indirect network effects between the two sides of the platform. As a matter of theory, for example, profit-maximizing prices may entail below-cost pricing to one set of customers over the long run and, as a matter of fact, many two-sided platforms charge one side prices that are below marginal cost and are in some cases negative. These and other aspects of two sided platforms affect almost all aspects of antitrust analysis—from market definition, to the analysis of cartels, single-firm conduct, and efficiencies. Economic Background on Two-Sided Platforms A heterosexual, singles-oriented club offers some intuition on the economics of two-sided platforms. A nightclub, such as Bungalow in Manhattan, provides a platform where men and women can meet and search for interactions and potentially dates. The club needs to get two groups of customers on board its platform to have a service to offer either one: it needs to get both men and women to come. Moreover, the relative proportion of men and women matters. A singles club with few women will not attract men, and a club with few men will not attract women. Pricing is one way to get the balance right. The club might want to offer women a break if they are in short supply (through a lower price or free drinks). Or it might want to ration the spots to ensure the appropriate number of women; popular clubs typically have queues waiting outside, and women are picked out of line disproportionately. The dating club example motivates the informal definition of a two-sided platform that we introduced in the beginning paragraph. There are two groups of customers—men and women. Members of each group value members interacting with members of the other group. And the platform provides a place for them to get together and interact. By doing so it enables members of these two groups to capture various benefits from having access to each other. Exchanges Exchanges have two groups of customers, who can generally be considered “buyers” and “sellers.” The exchange helps buyers and sellers search for feasible contracts— that is where the buyer and seller could enter into a mutually advantageous trade—and for the best prices—that is where the buyer is paying as little as possible and the seller receiving as much as possible. We use the term buyers and sellers here loosely. The term, “exchanges,” covers various matchmaking activities such as dating services and employment agencies. It also covers traditional exchanges such as auction houses, internet sites for business-to-business, person-to business, and person-to-person transactions, various kinds of brokers (insurance and real estate) and financial exchanges for securities and futures contracts. Finally, exchanges include a variety of businesses that provide brokerage services. These include publishers (readers and authors), literary agents (authors and publishers), travel services (travelers and travel-related businesses), and ticket services (people who go to events, and people who sponsor events). Exchanges provide participants with the ability to search over participants on the other side and the opportunity to consummate matches. Having large numbers of participants on both sides increases the probability that participants will find a match. Depending on the type of exchange, however, a larger number of participants can lead to congestion. That is the case with physical platforms such as singles clubs or trading floors. Moreover, participants may derive some value from having the exchange prescreen participants to increase the likelihood and quality of matches. Advertising-supported media Advertising-supported media such as magazines, newspapers, free television, and web portals are based on a two-sided business model. The platform either creates content (newspapers) or buys content from others (free television). The content is used to attract viewers. The viewers are then used to attract advertisers. Most advertising-supported media earn much of their revenues—and probably all of their gross margin—from advertisers.Print media are often provided to readers at something close to or below the marginal cost of printing and distribution. Transaction systems Any method for payment works only if buyers and sellers are willing to use it. Humans switched from barter when they were agreed on a standard medium for exchange—such as metallic coins or seashells. Governments facilitated this by ensuring the integrity of coins (to various degrees) and by using governmentissued coinage for buying and selling. Cash, which has no intrinsic value in most modern economies, provides a payment platform because buyers and sellers expect that other buyers and sellers will use it. Of course the government facilitates this with various laws and through its own buying and selling activities. For-profit transaction systems are based on the same principles although they have challenges that governments—which at least in principle can create a platform by fiat—do not necessarily have. Although bank checks and travelers’ checks are also examples of for-profit transaction systems, we focus on payment cards, which have been the subject of significant competition policy scrutiny in many countries. American Express, Discover, and, until its recent absorption into MasterCard, Diners Club, set prices to merchants—the merchant discount, which gives rise to a positive variable transaction price—and to cardholders—annual fees and various rewards which may give rise to negative variable transaction prices. Card associations such as MasterCard and Visa have been examples of cooperative two-sided platforms. For a transaction to be consummated there has to be an agreement on the division of profits and the allocation of various risks between the entity that services the merchant and the entity that services the cardholder. Most card associations set this centrally as, in effect, a standard contract between the businesses that service the two sides. Typically, they agree that the entity that services the merchant pays a percentage of the transaction - the “interchange fee” - to the entity that services the cardholder. This fee ultimately determines the relative prices for cardholders (issuers obtain a revenue stream which they compete for) and merchants (acquirers pass the cost of the interchange fee onto merchants). This centrally set fee has been the subject of litigation and regulatory scrutiny, as we discuss below. Software platforms A software platform provides services for applications developers; among other things, these services help developers obtain access to the hardware for the computing device in question. Users can run these applications only if they have the same software platform as that relied on by the 1. Indirect Network Effects Indirect network effects between the two sides promote larger and fewer competing two-sided platforms. Platforms with more customers of each group are more valuable to the other group. For example, more users make software platforms more valuable to developers and more developers make software platforms more valuable to users. These positive-feedback effects make platforms with more customers on both sides more valuable to both sets of customers. If there were no countervailing factors, we would expect that indirect network effects would lead two-sided platforms to compete for the market. First movers would have an advantage, all else being equal. We would have the familiar story that the firm that obtains a lead tends to widen that lead as a result of positivefeedback effects and therefore wins the race for the market. 2. Economies and Diseconomies of Scale For many two-sided platforms there would appear to be significant fixed costs of providing the platform. This should lead to scale economies over some range of output. Diseconomies may set in at some point for various reasons on one or both sides. For example, to persuade existing end users to replace (i.e., upgrade) their existing software platforms software, platform vendors have to add features and functionality. Many of these improvements may be designed to encourage application developers to write new or improved applications for the platform that in turn benefit end users. However, as software platforms have gotten larger and more complex, it has become more expensive and time consuming to add features and functionality. The most recent version of the Apple OS took four months longer to develop than the previous version. 3. Congestion and Search Optimization Several design issues tend to limit the size of two-sided platforms. Physical platforms such as trading floors, singles clubs, auction houses, and shopping malls help customers search for and consummate mutually advantageous exchanges. At a given size expanding the number of customers on the platform can result in congestion that increases search and transaction costs. For example, increasing the volume of advertising in a newspaper may not only crowd out the content that attracts the readers but also result in a cacophony of messages that reduces the effectiveness of any particular advertisement. 4. Platform Differentiation and Multi-Homing Platforms can differentiate themselves from each other by choosing particular levels of quality (what is known as “vertical differentiation”) with consumers choosing the higher or lower quality of platform depending on the income and relative demand for quality. There are, for example, upscale and downscale malls. Platforms can also differentiate themselves from each other by choosing particular features and prices that appeal to particular groups of customers (what is known as “horizontal differentiation”). Empirical eidence on two-sided industry structure It is possible to see some regularities across industries in which two-sided platforms appear to be the dominant form of organization. • It is relatively uncommon for industries based on two-sided platforms to be monopolies or near monopolies. • Multi-homing on at least one side is common. • Asymmetric pricing is relatively common. Many two-sided platforms appear to obtain the preponderance of their operating profits (rev-enues minus direct costs) from one side. Overview of Antitrust Cases Involving Two-Sided Markets Many antitrust cases have involved two-sided platforms. A few—including several important ones —seem to have touched on two-sided issues before economists began to address them formally. And some are based on analyses of markets and practices that, putting aside whether they led to the correct outcome or not, are analytically wrong from the perspective of the two-sided literature. NaBanco In NaBanco v. Visa, the federal district court and the U.S. Court of Appeals for the Eleventh Circuit recognized several of the key features of what have become known as two-sided platforms. Visa was (and is) a cooperative of banks that issued cards and acquired those card transactions from merchants. It established a rule for governing the situation in which an individual whose card was issued by bank A paid with that card at a merchant acquired by bank B, where A and B are different banks. Although those banks could have a bilateral agreement, Visa established a default rule that among other things determined the allocation of the profits and risks of the transaction. This rule provided that given the various allocations of risks and costs that the bank that acquired the transaction (B) had to pay the bank (A) that issued the card a percent of the transaction amount; this percent is known as the interchange fee, and it was initially set at 1.95 percent. Stock exchange mergers In recent years, stock exchanges have increasingly looked to merge with each other. In December 2004, Euronext and Deutsche Börse, respectively the second and third largest stock exchanges in Europe by value of trading, made bids to take over the London Stock Exchange, the largest stock exchange in Europe. Both bids were referred to the U.K.’s Competition Commission for investigation under U.K. competition law—they did not qualify for investigation by the European Commission under EU law. In its report, the Competition Commission expressed concerns about the ownership of clearing services by the Euronext or Deutsche Börse that was likely to result post merger. Stock and other exchanges exhibit significant network effects. Fundamentally, more trading activity on the part of providers and consumers of liquidity tends to reduce spreads between bid and ask prices and to make markets more liquid, so that large blocks of stocks, options, or commodities can be bought or sold rapidly without a price penalty. And, of course, smaller bid-ask spreads and more liquidity tend to attract more trading. The more investors that come to a market, the more attractive that market becomes to liquidity providers, and the more liquidity providers are present, the more attractive the market is to investors. Traditionally, stock exchanges have tended to be local monopolies, due in large part to these network effects, to regulations that restricted cross-border trading and, historically in the United States, to communications costs that created a niche for regional exchanges like the Boston Stock Exchange. As these restrictions have been relaxed and communications costs have fallen, competition has increased generally, and many exchanges have abandoned their traditional non- profit, cooperative structures and become for-profit firms. In the United States, regional stock exchanges have had trouble competing with the NYSE, but competition between the NYSE and NASDAQ has intensified. There are now six competitive equity options exchanges in the United States; they are linked electronically so that investors are guaranteed the best available price, and the largest market shares hover below 40 percent. Stock exchanges have been ordered to provide such linkage; this is expected to happen in the first half of 2007 and may have a major effect on the competitive landscape. Microsoft Media Player The European Commission found that Microsoft had abused a dominant position in operating systems by including media player technologies in Windows. It argued that there were indirect network effects between the use of media play- ers and the provision of content. If more people have a particular media player, content providers will tend to encode content in that format. If more content is available in the format for a particular media player, users will tend to use that media player. The Commission argued that content providers would standardize on Windows Media Player because this player was available on most personal computers, which of course included Windows. In effect, the Commission argued that the existence of network effects would result in the “media player market” tipping to Windows Media Player. Magill Magill is a leading EC case involving the compulsory licensing of intellectual property. What makes it interesting from a two-sided standpoint is that it involved several interlinked two-sided platforms. The defendants in the case were three television networks (RTE, BBC, and ITV) whose broadcasts were received in Ireland. RTE and ITV were two-sided platforms, receiving revenues from advertisers. RTE was also supported by licenses paid by consumers for having television sets. The BBC received similar revenues from licenses for television sets in the United Kingdom (but not Ireland). The BBC did not allow advertising and was not a two-sided platform. All three networks published an advertising-supported television guide that contained their own weekly listings; these were two-sided platforms. In addition they each provided their daily listings to newspapers—other two-sided platforms—that combined the listings. Antitrust Implications of Two-Sided Platform Economics Whether the economics of two-sided platforms can assist in determining whether a merger or business practice is anticompetitive is, like many aspects of economics, an empirical question. As with market power generally two-sidedness is a matter of degree. Sometimes the two-sided nature of the business is critical for the analysis. Market definition and market power The analysis of market power, and the associated issue of the definition of the relevant market are typically a central component of antitrust cases, although the reasons for this vary somewhat across antitrust matters. In most cases it is crucial to determine whether the defendants have or could obtain significant market power and thus, by definition, maintain or raise prices above the competitivelevel. The determination of whether a firm or group of firms has market power can also be important because entities that have significant market power are more likely to have the ability and incentive to engage in business practices that could foreclose competition. Coordinated practices The key insight of the economics of two-sided platforms in the oligopoly context is that to be successful cartels may need to coordinate on both sides. Consider the situation in which there are several competing two-sided platforms. If they agree to fix prices on one side only the cartel members will tend to compete the supracompetitive profits away on the other side. This observation has two corollaries. The first is that it is harder to form an effective cartel in an industry with twosided platforms than in single-sided industries, all else equal. The cartel requires more agreements and monitoring because