Experimentation in Two-Sided Markets

Peitz, Martin ; Rady, Sven ; Trepper, Piers

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URL:	https://ub-madoc.bib.uni-mannheim.de/32932
URN:	urn:nbn:de:bsz:180-madoc-329324
Document Type:	Working paper
Year of publication:	2013
The title of a journal, publication series:	Working Paper Series
Volume:	13-03
Place of publication:	Mannheim
Publication language:	English
Institution:	School of Law and Economics > VWL, Industrieökonomik, Wettbewerbspolitik u. Regulierung (Peitz 2007-)
MADOC publication series:	Department of Economics > Working Paper Series
Subject:	330 Economics
Classification:	JEL: D42 , D83 , L12,
Keywords (English):	Two-Sided Market , Network Effects , Monopoly Experimentation , Bayesian Learning , Optimal Control
Abstract:	We study optimal experimentation by a monopolistic platform in a two-sided mar- ket. The platform provider faces uncertainty about the strength of the externality each side is exerting on the other. It maximizes the expected present value of its profit stream in a continuous-time infinite-horizon framework by setting participation fees or quantities on both sides. We show that a price-setting platform provider sets a fee lower than the myopically optimal level on at least one side of the market, and on both sides if the two sides are approximately symmetric. If the externality that one side exerts is sufficiently well known and weaker than the externality it experiences, the optimal fee on this side exceeds the myopically optimal level. We obtain analogous results for expected prices when the platform provider chooses quantities. While the optimal pol- icy does not admit closed-form representations in general, we identify special cases in which the undiscounted limit of the model can be solved in closed form.