We argue that skewed pricing found empirically in many two sided markets, can perhaps be explained by which side chooses the platform when both sides are willing to transact on multiple platforms.

1. Competition, bargaining power and pricing in two-sided markets Kimmo Soramäki Helsinki University of Technology www.soramaki.net Wilko Bolt De Nederlandsche Bank Norges Bank Oslo, 24 February 2008

8. The model 1. buyers are willing to transact on a platform if u b ≥p b 2. if u b ≥p b 1 and u b ≥p b 2 , buyers prefer platform with lower price 3. if u b ≥ p b 1 =p b 2 , half prefer platform 1, and half prefer platform 2 4. the same holds for sellers 5. if buyers and sellers are willing to transact on both platforms, but prefer a different one – choice is determined by bargaining power characterized by τ platform 1 buyers sellers platform 2

11. Demand and profit Profit (c=marginal cost): Platforms need to evaluate 9 price regions. Demand :

12. Best-reply dynamics 45 º starting point: zero profits price demand is split by the two platforms 45 º

13. Best-reply dynamics 45 º Monopolistic best reply - platform gets monopolistic demand and profits - competitor gets demand only from sellers with p s 0 < u s < p s M

14. Best-reply dynamics 45 º h ε Undercutting phase undercutting by ε optimal overpricing by h - undercutting other platform’s buyer price will get all eligible buyers on board - this allows the platform to increase seller price to a point where the increased margin offsets lost demand

15. Best-reply dynamics 45 º h ε Corner price Undercutting and overpricing continues until corner price is reached. Here platforms split the demand

16. Best-reply dynamics 45 º Two Nash-equilibria &quot;Grab the dollar&quot; - game One of the platforms sets its seller price below p s C . Its margin is lower but it has additional demand from sellers with p s C <u s <p s C . The best response to this is p C . The platform with lower seller price has higher profits -> &quot;first mover advantage&quot; c < c*

17. Best-reply dynamics 45 º Best reply to corner price in case of high marginal cost Increase in buyer’s price, but decrease in seller’s price to level where the platform gets demand from sellers with p s BR <u s <p s C , i.e. seller’s that are not willing to transact on the other platform c > c*

18. Out-of carrier pricing Undercutting continues below carrier Nash equilibrium exists if a price control exists to the right of the intersection Without price controls undercutting continues until a &quot;flip&quot; in prices is better : no equilibrium c-u s p H p L p M

22. Takk contact me at: kimmo@soramaki.net