Beruflich Dokumente
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TWO-SIDED MARKETS
A. Introduction
12. Many two-sided platforms have positive indirect networks for both sides.
In the case of advertising-supported media, advertisers value a platform
more if it has more viewers but viewers may not value a platform more if
it has more advertising; the platform solves this asymmetry in valuation
by paying viewers to join the platform in the form of free content. Evans
& Schmalensee, Industrial Organization, supra note 1, at 155-56.
13. CATALYST CODE, supra note 9, at 7
14. Evans, supra note 4, ¶ 8 & n.10 (citing Rochet & Tirole, Two-Sided
Markets, supra note 8).
6 Market Definition
15. See David S. Evans, The Economics of the Online Advertising Industry, 7
REV. NETWORK ECON. 359, 372-75 (2008).
16. In addition to traditional indirect network effects, externalities in use are
also important: in the case of payment cards a product cannot exist unless
there is a cardholder and an accepting merchant. See Evans, supra note 4,
¶ 8 & n.12 (citing Rochet & Tirole, Platform Competition, supra note 2).
17. See David S. Evans, How Catalysts Ignite: The Economics of Platform-
Based Start-Ups, in PLATFORMS, MARKETS AND INNOVATION (A. Gawker
ed. forthcoming 2009) (discussing solving the start-up problem for two-
sided platforms); see also CATALYST CODE, supra note 9, at 89-91
(discussing two-sided platforms’ pricing and commitment); Andrei
Hagiu, Pricing and Commitment by Two-Sided Platforms, 37 (3) RAND J.
ECON. 720 (2006) (same).
Two-Sided Markets 7
in most cases. Setting store rental prices too high at malls could result in
shoppers not having access to the stores they most care to go to.
A two-sided platform’s profit-maximizing calculus is thus more
complex than that of a traditional business. The two-sided platform
needs to consider the demands of both sides, the interrelationships
between these demands, the costs directly attributable to each side, and
the costs of running the platform. Many platforms consider both access
fees to join the platform and usage fees to interact on the platform in
establishing prices that attract the optimal volume of transactions on each
side of the platform.
One side of a two-sided platform usually gets a better deal or
receives service for free. For example, searchers do not pay search
engines, advertisers do. Buyers do not pay a fee on many online
transaction platforms, sellers do. Merchants, rather than cardholders, pay
for most of the cost of payment card schemes. Retail stores, not
shoppers, pay to get access to a shopping mall. End users pay for most
software platforms, but software developers often get access to code for
free. Women often get discounts from dating services, while men
seldom do.
There are many practical reasons for price differences between the
two sides of a platform. A two-sided platform has to attract enough
members on each side to have sufficiently thick markets. Most business-
to-business exchanges failed in the early 2000s because, even though
many buyers had signed on, there were not enough sellers to make the
exchange attractive.18 A two-sided platform may therefore find that it
has to keep prices very low to one side to attract enough participants to
make the platform valuable to the other side. The side that is needed
more or that is harder to get receives a price break; conversely the side
that gets the most value out of access to members of the other side bears
18. See Bob Tedeschi, Investing; How Killer B-to-B’s Went Into A Tailspin,
N.Y. TIMES, May 7, 2000; Hazel Ward, B2B Exchanges Fail to Deliver,
ComputerWeekly.com, Nov. 29, 2001,
http://www.computerweekly.com/Articles/2001/11/29/183994/b2b-
exchanges-fail-to-deliver.htm; Kate Hanaghan, B2B Exchanges—What
Happens Now?, Silicon.com, Jan. 23, 2002,
http://software.silicon.com/webservices/0,39024657,11030680,00.htm.
8 Market Definition
19. See, e.g., Rochet & Tirole, Two-Sided Markets, supra note 8, at 659 (“[I]t
is quite common for a platform to charge below-cost (perhaps zero)
prices to one side and high prices to the other.”); Mark Armstrong,
Competition in Two-Sided Markets, 37 RAND J. ECON. 668, 682 (2006)
(noting that in some cases prices to one side of the two-sided platform are
“below cost”).
20. See Evans, supra note 4, ¶ 14 (citing Paul A. Samuelson & William D.
Nordhaus, ECONOMICS (18th ed. McGraw-Hill/Irwin 2005)).
21. See U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, HORIZONTAL
MERGER GUIDELINES, § 0.1 (1992) [hereinafter MERGER GUIDELINES],
reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104 (“Market power to a
seller is the ability profitably to maintain prices above competitive levels
for a significant period of time.”); see also Dennis W. Carlton, Market
Definition: Use and Abuse, 3 (1) COMPETITION POL’Y INT’L 2, 5 (2007)
(“Roughly speaking, ‘market power’ means that the industry’s behavior
deviates from perfect competition. One standard definition of market
power is the ability to set price profitably above the competitive level,
which is usually taken to mean marginal cost.”).
22. See Rochet & Tirole, Platform Competition, supra note 2, at 996-97.
Two-Sided Markets 9
example, all have pricing structures in which merchants pay for the much
of the cost of the system while cardholders are subsidized through
rewards and the float on their balances.23
A common condition for economic efficiency is that “the
competitive price equals marginal cost of production.”24 Nonetheless,
this condition does not necessarily hold in the case of two-sided
platforms in part because there is joint production of services to the two
sides.25 For example, a shopping mall provides services jointly to
retailers and shoppers. In some cases, the product cannot exist without
both sides’ participation: A credit card provides transaction services only
if there is a person who uses the card for payment and a merchant who
takes the card for payment. 26
These considerations have implications for the analysis of market
power. The analysis of either side of a two-sided platform in isolation
yields a distorted picture of the business. The low-margin side will tend
to appear highly competitive in the sense that prices are not significantly
23. Evans, supra note 4, ¶ 15 & n.18 (citing David S. Evans & Richard
Schmalensee, The Economics of Interchange Fees and Their Regulation:
An Overview, in INTERCHANGE FEES IN CREDIT AND DEBIT CARD
INDUSTRIES: WHAT ROLE FOR PUBLIC AUTHORITIES? (Santa Fe: Federal
Reserve Bank of Kansas City, May 2005)).
24. See DENNIS W. CARLTON & JEFFREY M. PERLOFF, MODERN INDUSTRIAL
ORGANIZATION 70 (4th ed. 2005).
25. This point was first observed for the case of payment cards in a seminal
paper that is a precursor to the two-sided economics literature.” Evans,
supra note 4, ¶ 16 n.19 (citing William F. Baxter, Bank Interchange of
Transactional Paper: Legal and Economic Perspectives, 26 J. L. & ECON.
541, 544 (1983)).
26. See Baxter, supra note 25, at 544 (“The mechanics of transactional
services require that for every transaction in which a purchaser becomes a
maker of a check, there must be one- and precisely one-transaction in
which a merchant becomes a payee; similarly, each use of a credit card by
a card holder must be matched by precisely one act of acceptance of the
card (or, more accurately, the paper that the card generates) by a
merchant.”). See generally Nat’l Bancard Corp. v. Visa U.S.A. Inc., 779
F.2d 592, 594 (11th Cir. 1986) (discussing “the workings of the bank
credit card industry”).
10 Market Definition
higher than marginal cost. The high-margin side will tend to appear
much less competitive because prices are much higher than marginal
cost. Competition between platforms may result in squeezing the
margins down on the high-margin side but will not fundamentally alter
the skewed pricing structure which results from all firms’ seeking to
perform the same balancing act. To analyze market power and to
understand competitive and anticompetitive strategies involving two-
sided platforms one has to consider the interplay between the two sides.
Consider the payment card industry. A card scheme could enter into
a massive promotion campaign to persuade merchants to take its card
exclusively. An analysis of the merchant side only might reveal that the
card scheme has not recouped its losses. But the card scheme might also
raise fees to cardholders. Taking both sides into account, it does recoup
its predatory losses. 42
42. See Julian Wright, One-Sided Logic in Two-Sided Markets, 3 (1) REV.
NETWORK ECON. 44, 48 (2004) (explaining why a two-sided platform’s
below-cost pricing does not indicate predation).
43. See Evans, supra note 4, ¶ 25 & n.23 (citing Thomas R. Eisenmann,
Geoffrey Parker & Marshall W. Van Alstyne, Platform Envelopment 1
(Working Paper 2007), available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=996852).
Two-Sided Markets 15
games and it was not possible to use third party games with the
consoles.48 Apple has chosen to make its iPod work only with its own
media store iTunes while Sony has chosen to make its line of mp3 and
media players work with multiple sources of media.
Finally, a two-sided platform may compete with a series of
businesses that, when combined, provide similar services to the same two
groups of customers. For example, American Express and Visa compete
for cardholders and merchants. American Express is an integrated two-
sided platform that performs all of the necessary steps for meeting
cardholder and merchant demand. By contrast, Visa is a collection of
separate entities that—when combined—perform services similar to
those provided by American Express. Working from the merchant level
to the cardholder level, there are acquirers that contract to take card
receivables, merchant processors that handle the actual data processing
and switching services, Visa that stands at the center of this platform as
the switch for transactions, card processors that handle data processing
for banks, and banks that issue cards to consumers.
Each of these market constellations results in different forms of
competitive constraints and possible counterstrategies from rivals. The
market boundaries that separate relevant from irrelevant constraints are
particularly complex. That fact cautions against placing great weight on
mechanical approaches to market definition that cannot account for
competitive nuances and complexities.
A natural way to map out the contours of the market is to identify the
groups of customers served by the subject of the inquiry and its likely
rivals, and then identify the various businesses that serve these
customers. The digital media business provides an example. Suppose
one needs to define the relevant product market for a media player such
as Adobe’s Flash. As of 2007, Adobe has three groups of customers—
end users who receive its player for free; enterprises that pay for its
server; and content providers that use its tools to create content.49 These
three groups of customers are served to various degrees by (1) Apple’s
iPod/iTunes, a vertically integrated platform with its own media player;
(2) Microsoft’s Windows Media Player technologies included both in its
client and server software; (3) RealPlayer, a stand-alone product for
48. See INVISIBLE ENGINES, supra note 47, at 301 (“[I]n video games both
Sony and Microsoft acquired several high-profile game developers before
releasing their consoles so that both end users and other game developers
could reliably expect their consoles to have a number of high-quality
games.”).
49. Id, chapter 7.
Two-Sided Markets 17
clients and servers and the base for a media store that competes with
iTunes; (4) software vendor Autodesk that provides tools to content
providers to make their content available in various formats including
Windows Media, QuickTime, or MPEG-2; and (5) various other
businesses including Sorenson, Canopus, and others.50 Not all these
entities will necessarily be part of a properly defined relevant market.
However, to define relevant markets in cases involving two-sided
platforms, one must consider multiple types of potential competitors that
may constrain the pricing and other strategies of the subject of the
inquiry.
In most cases, the agencies “will use a price increase of five percent
lasting for the foreseeable future,” but may “use a price increase that is
larger or smaller than five percent” depending on the industry involved. 63
59. This section compares two-sided and one-sided SSNIP tests. The one-
sided SSNIP test’s recognized deficiencies are also true in the two-sided
context. See Chapter 1 for a full discussion of one-sided SSNIP test.
60. See MERGER GUIDELINES, supra note 21, § 1.11.
61. Id.
62. Id.
63. Id.
20 Market Definition
SSNIP test may turn out to be unprofitable under the two-sided SSNIP
test.74
A two-sided extension of the SSNIP test could address these issues at
least in theory. The analyst would start with the two-sided platform at
issue and add its closest substitutes.75 The analyst would then ask
whether the combined platforms could increase the weighted average
price by a given percentage and thereby reduce the weighted average
output of the platforms.76 At each step, the hypothetical monopolist
would be expected to “reoptimize prices across sides and across
platforms,” considering the feedback effects.77 Additional platforms can
be added. This approach becomes more difficult to implement when a
two-sided platform faces diverse competitors with different business
models. 78
There are “many reasons to be weary of mechanical market
definition exercises such as the SSNIP test,” which “do not go away”—
and in some cases are exacerbated—when two-sided platforms are
involved. 79 For example, should one include both sides of the [two-sided
platform] business . . . in the market definition of just one side? The
answer can be difficult and depends on the situation at hand.”80 In
discussing the SSNIP test, the Merger Guidelines refer to “adding or
removing ‘substitute products.’”81
The difficulty is that the sides of a given [two-sided platform] represent
highly complementary products, and pricing decisions on both sides
74. See Evans & Noel, supra note 1, at 669-70 (“Because the analyst’s
estimate does not account for feedback effects, the full impact of the
price increase on demand is underestimated. As a result, antitrust
markets necessarily will be defined too narrowly, and merger analysis
will overstate the increase in market power of merging parties and
overstate the predicted unilateral price effects of the transaction.”).
75. Evans & Noel, supra note 1, at 669-78.
76. Evans & Noel, supra note 1, at 669-78.
77. See Evans & Noel, supra note 1, at 674.
78. Evans & Noel, supra note 1, at 669-78.
79. See Evans & Noel, supra note 1, at 674.
80. Id.
81. Id.
22 Market Definition
Another issue with the SSNIP test is that “we would expect a
hypothetical monopolist of several platforms to reoptimize prices across
sides and across platforms just as we would expect a hypothetical
monopolist to reoptimize across products in a one-sided world.”83 The
Merger Guidelines
suggest that the price increase deemed significant for market definition
purposes will generally be uniform across all products within the
definition (for example, 5 percent), and “the terms of sale of all other
products [outside the proposed antitrust market] are held constant” (that
is, 0 percent price increase). In the case of [two-sided platforms], one
could instead imagine price increases that differ across sides or
platforms, or consider a kind of 5 percent quantity-weighted “average”
price increase across sides, allowing the hypothetical platform
monopolist to reoptimize relative prices.84
82. Id.
83. Id.
84. Id.
85. See Evans & Noel, supra note 1, at 668; see also Barry Harris & Cento G.
Veljanovski, Critical Loss Analysis: Its Growing Use in Competition
Law, 5 E.C.L.R. 213 passim (2003) (discussing the use of critical loss
analysis in antitrust law); James Langenfeld & Wenqing Li, Critical Loss
Two-Sided Markets 23
90. Evans & Noel, supra note 1, at 666; see id. at 676 (“The one-sided Lerner
Index is incorrect for [two-sided platforms] and relying on it significantly
overestimates the true short-run own price-elasticity of demand and
overstates Actual Loss.”).
91. If the elasticity of demand is the inverse of the profit margin, and the
profit margin is 25%, then the elasticity of demand is the inverse of 25%,
1/.25, or 4.
92. Evans & Noel, supra note 1, at 676.
93. Evans & Noel, supra note 1, at 670, 689. One should not, however, lose
sight of the most fundamental mistake: leaving out the second side of a
two-sided market altogether.
94. Evans & Noel, supra note 1, at 669-78.
95. Evans & Noel, supra note 1, at 669-78. In performing a preliminary
calculation based on readily observed data, the analyst might have little
basis to estimate the magnitude of the feedback effects.
96. To simplify the computation of the Critical Loss of output on side A, we
assume that the two sides of the hypothetical monopoly platform are tied
in fixed proportions. An example of such a platform is a transaction
market like credit card services where a transaction takes place between a
Two-Sided Markets 25
Table 1.
Impact of Feedback Effects on Actual Loss Estimation in Two-Sided
Platforms, Assuming a Price Increase of 10% on Side A
Profit Elasticity Feedback Feedback Actual Critical Expand
Margin of from side from side Loss Loss In / Shrink
on side demand A to side B to side in Output
A on side A B A Output on side
on A
side A
25% 4 2 1 -40% 17% Expand
25% 4 2 1.1 -33% 17% Expand
25% 4 2 1.25 -27% 17% Expand
25% 4 2 1.3 -25% 17% Expand
25% 4 3 1.11 -17% 17% Market
Defined
25% 4 3 1.25 -15% 17% Shrink
25% 4 3 1.3 -14% 17% Shrink
25% 4 3 1.3 -14% 17% Shrink
that consumers use the directory.”106 These results imply the existence of
indirect network effects between the two sides.107
106. Id.
107. Id.
108. 345 U.S. 594, 610-11 (1953).
109. 779 F.2d 592 (11th Cir. 1986).
110. See id. at 600-02.
111. Id. at 602 (quoting Robert H. Bork, The Rule of Reason and the Per Se
Concept, 75 YALE L.J. 373, 474 (1966)).
28 Market Definition
The court of appeals upheld the district court’s conclusion that the
relevant market was “all payment devices,” noting that the market was
the same, whether viewed from the perspective of the plaintiff
(processing agent), the defendant (credit card system operator), or
consumers (cardholders).112
In United States v. First Data Corp.,113 the U.S. Department of
Justice (DOJ) sued to block a merger of First Data Corp. (First Data) and
Concord EFS, Inc. (Concord).114 First Data controlled NYCE
Corporation, “the nation’s third-largest PIN debit network.”115 Concord
operated “STAR, the nation’s largest PIN debit network” that handled
“approximately half of all PIN debit transactions in the United States.”116
Debit card systems serve consumers who use cards for payment and
merchants that accept card payments.117
To execute a PIN debit transaction, a customer swipes a debit card at a
[point of sale (POS)] terminal and enters a PIN on a numeric keypad.
After the PIN is entered, the POS terminal transmits the transaction and
bank card information to a “merchant processor,” which acts as a
conduit between the merchant and the various PIN debit networks. The
merchant processor sends the information to the appropriate PIN debit
network, which switches the transaction to the issuing bank’s “card
processor.” The card processor accesses the bank’s account database to
verify the PIN and ensure that the customer has sufficient funds to pay
for the purchase. The card processor sends an electronic message to the
PIN debit network accepting or rejecting the transaction. The PIN
debit network switches this reply back to the merchant through the
merchant processor to complete the transaction. The entire
authorization process takes place electronically in just seconds. At the
same time, the merchant acquirer “purchases” the transaction from the
merchant, guaranteeing payment and facilitating settlement of the
transaction.118
authenticated like credit card transactions,” except the customer signs for
identification at the merchant POS instead of entering a PIN.119
The DOJ defined the relevant market as “the provision of PIN debit
network services.”120 The DOJ explained that—compared to signature
debit networks—PIN debit networks “offer a number of substantial
advantages to consumers and merchants.”121
PIN debit networks are generally considerably less expensive to
merchants than signature debit networks, due to significantly lower
interchange rates. PIN debit networks also provide a more secure
method of payment than signature debit because it is much easier to
forge a person’s signature than to obtain an individual's PIN;
consequently, fraud rates for PIN debit are substantially lower than for
signature debit. Because of the increased security of PIN debit, there is
no need for the complicated and expensive charge-back procedures that
allow consumers to challenge signature debit transactions, thereby
saving merchants additional time and money. PIN debit transactions
also settle instantaneously, guaranteeing the merchant ready access to
its receipts, whereas signature debit transactions usually take a day or
two to settle. Finally, PIN debit networks allow for faster execution
than signature debit networks. With a PIN debit transaction, customers
can enter their PIN as soon as the first product is scanned. By contrast,
customers cannot sign for signature debit transactions until after the
entire order is totaled, prolonging the checkout process. 122
The government concluded that “[a] 5-10 percent increase in the fees
the merchants pay for PIN debit would not change any of the above . . . .
Consequently, the overwhelming majority of merchants would not reject
or discourage customers from executing PIN debit transactions in
response to a moderate increase in the price of the product.”129 The
parties settled before trial by agreeing to divest the NYCE networks.130
In GTE Media Services v. Ameritech Corp.,131 in assessing the
competitive effects of the defendants’ conduct in the Internet Yellow
Pages segment, the district court recognized the two-sided nature of
yellow pages businesses. 132
The commercial nature of the defendants’ websites is revealed by the
advertising revenues the defendants generate when users in . . . interact
with their Internet Yellow Pages websites. Similar to publishers of the
traditional, non-Internet Yellow Pages, the defendants directly earn
revenue by selling advertising space to advertisers. Therefore,
advertising revenue in the Internet Yellow Pages market substantially
depends on the number of users accessing a particular website because
Internet advertisers are willing to pay higher advertisement rates on
websites with a higher volume of user traffic. 133
129. United States v. First Data Corp., No. 1:03CV02169 (D.D.C. 2003)
(plaintiff’s pretrial brief). The DOJ clarified that “consideration of the
bank side of the market does not in any way suggest that the hypothetical
monopolist test leads to the wrong result.” Id. § V.C. This is perhaps
best seen as an example of where the five-to-ten percent SSNIP test
defines a narrow market that seems at odds with the economics of the
business under consideration.
130. United States v. First Data Corp., 2004 U.S. Dist. LEXIS 13590, at *9-10
(D.D.C. 2004)
131. 21 F. Supp. 2d 27 (D.D.C. 1998).
132. Id. at 38-39.
133. Id.
134. Id. at 42-45.
32 Market Definition
decentralized platform. 161 Key issues are the extent to which the two
platforms are substitutes taking both sides into account.162 If the two
types of platforms are in the same market, the inquiry should focus on
the effect of the acquisition of an input into one platform type on prices
and other competitive strategies. 163
F. Conclusion