E Primeros auxilios.
SECCIÓN 2.ª SOLICITUD Y TRAMITACIÓN
The net neutrality debate in many ways centers around the understanding of two- sided markets, because debate is about whether an ISP should operate as a platform in a two-sided market or not. Because of network externalities and a complicated ecosystem it is not straight forward to deduce the effects of a transition based on general research on two-sided markets. Still, the previous research provides important insights on modelling two-sided markets, strategies and general assumptions. The following section contains short summaries of relevant literature on two-sided markets. Three of the articles contain mathematical models, [18] - [20], two are strategic, [26] and [27], and the last descriptive, [28].
2.2.1 Summaries on Articles Covering Two-sided Markets
Competition in two-sided markets (Mark Armstrong, 2006) [18]
The article discus two-sided pricing with three different models: a monopoly platform, a model of competing platforms where agents join a single platform and a model of competitive bottlenecks where one group joins all platforms. The article provides necessary and sufficient condition for a market sharing equilibrium to exist, and postulate formulas to calculate welfare maximizing and profit maximizing formulas. The article also discusses different pricing schemes, e.g. two-part tariffs or uniform prices. The models are put up with examples from real life, e.g. Supermarkets where the customers enter for free and the shops pay a sum to the supermarket (this is a competitive bottleneck). The models are analyzed and the effects of two sided pricing are discussed for the different scenarios.
Two-Sided Markets: An Overview (Rochet and Tirole, 2004) [19]
The article is very similar to the progress report by the same authors, [20], which was published two years later. Much of the results in that article is based on the research in this article, and the conclusions the same. However, this article is a bit more comprehensive in describing the different types of two sided markets, that can be interaction between two end users, but end-users can also connect to the platform through intermediaries or “service providers”. There can also be “on us” or “on net” interactions. If the buyers and sellers interact through the same platform, it is said to be “on us”. An example could be when the user and retail shop have a transaction through a credit card using the same bank. If for example a telephone operator may serve both the caller and the callee, and the backbone serve the website and the web user; the traffic is said to be “on net”. There may also be multiple non-interconnected platforms, for example when a seller wants to interact with as many buyers as possible through different platforms, or video game developers that create games for multiple platforms. They are then said to be “multi-homing”. The article also provides a
definition of two-sided markets, and a list of a platforms motivation to charging membership fees, in contrast to usage based fees only. The article provides the same mathematical model as in [20], and list several weaknesses to the model; that side i only cares about the number of users on the other side and no other factors such as quality, that the model excludes same side externalities, that the model does not consider users who might have ex ante private information about their future per- transaction benefit and that the model involves simultaneous courting of buyers and sellers. The article lastly discusses how platforms can regulate the interactions between the users, to encourage positive externalities and discourage negative ones.
Two-sided markets: a progress report (Rochet and Tirole, 2006) [20]
The article is a comprehensive analysis of two sided markets, defining two side markets and necessary and sufficient conditions for a market to be two sided. The article also provides a general mathematical model to analyze two-sided markets. Factors that make a market two-sided include transaction costs among end-users, platform-imposed constraints on pricing between end-users and membership fixed costs or fees. A market is defined as two-sided if the volume is dependent of the price structure (that is if the total price of the two agents are constant) the market is said to be two sided. A necessary condition for a market to be two-sided is the break-down of the Coase theorem; if the outcome of negotiations between two informed agents with established tradable goods and no transaction costs are not Pareto efficient. In other words the optimal allocation of resources cannot be negotiated between the two agents when they maximize their own surplus, and the platform has to set prices in order to maximize the surplus as both sides benefit from externalities by the other side. The article also discusses an extended model that allows for payments between end users with both symmetric and asymmetric information. With symmetric information Coasian bargaining between end-users calls for a pass-through of variable costs by the platform to the end users. However, with asymmetric information the platform should subsidize the transactions between end users. Concerning pricing the article concludes that it is tied to the Lerner formula (price elasticity), however because of the two-sidedness the cost must be replaced with opportunity costs.
Strategies for Two-Sided Markets (Eisenmann, Parker and Alstyne, 2006) [26]
The article discusses different strategies to win the battle in a two-sided market. The article considers different scenarios and examples from real life business. The article identifies three challenges in two sided markets: Pricing the platform, winner- take-all dynamics and the threat of envelopment. Concerning pricing it is important to price and substitute the right side, dependent of their characteristics and costs of serving them and externality effects. The winner-take-all dynamics refer to situations when multi-homing is expensive for at least one side. For example DVD, which took the whole market as it is costly for both producers and consumers to support more than one platform. The threat of envelopment refers to the situation when one
platform develops so that it also supports another platform, and can use bundle synergies to outcompete the smaller platform. The article provides different strategies companies can apply depending on which situation they are in.
The Economics of Two-Sided Markets (Mark Ryasman, 2009) [27]
The article describes what a two-sided market is, and discuss the two-sided market through the newspaper and media industry, payment card industry and operating systems industry. The article discusses strategies in two sided markets, and divides the strategies into pricing and openness. Where pricing focus on finding the right price for the two agents interacting through the platform. Openness refers to the choice of being one- or multi-sided, or whether to be compatible or incompatible with competitors. Sometimes it can be advantageous to be one-sided to begin with, in order to attract the valuable side before charging the other side. Openness can also be exemplified with Apple that produces both its own hardware and software with no third party producers. Microsoft on the other hand allows anybody to manufacture computers for their operating system, lowering the bar to use their product. Based on the openness discussion the article concludes that it is better to discuss two sided “strategies” rather than two-sided “markets”, as whether the market is one-, two or multi-sided depends on the strategy of the companies operating in the environment. The article also discuss other strategies, such as innovation, and public policies such as antitrust and regulations. The article asks for more work to be done on how open one should be, and how many sides of the market to allow.
Everything you wanted to know about Two-Sided Markets (Evans and Passell, 2003) [28]
The article describes what two-sided markets is, and provide some examples of two-sided markets, e.g. dating services and credit cards. The article further describes the economics of two-sided markets, and how the number and quality of one side attracts the other, which the platform can reap high revenues from. The article further describes profit maximization, entry costs and balancing demand in two-sided markets. Lastly the article discusses regulation and how two-sided markets often attract competition authorities, and the challenges of establishing a working two-sided pricing model. Usually the companies have to invest a few years before a profit can be reaped. When the model works, one side of the market usually bears most of the costs. This creates a challenge for the authorities as they have to distinguish between actions that would undermine competition in one-sided markets, yet serve long-term interests of consumers in two-sided markets. Two-sided markets also generally encourage novel partnerships arrangements among competitors, to increase competition on one side of the market, and reduce the competition on the other. An example are banks collaborating with VISA and MasterCard, reducing competition on the retail side by collaborating with a mutual platform, however increasing the competition for
customers as there are more banks able to provide an offer. The article suggests that regulators have to question whether the restraint of competition is justified by efficiency, and if regulation in the context of interest group pressure work better than without regulation.