Antitrust and competition in two-sided markets

Journal of Competition Law and Economics

Volumn 7, Issue 4, 2011, Pages 775-812

  Alexandrov, Alexei ^a   Deltas, George ^b   Spulber, Daniel F ^c  

^a UNIVERSITY OF ROCHESTER   (United States)

^b UNIVERSITY OF ILLINOIS AT URBANA CHAMPAIGN   (United States)

^c NORTHWESTERN UNIVERSITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 82955176905     PISSN: 17446414     EISSN: 17446422     Source Type: Journal    
DOI: 10.1093/joclec/nhr012     Document Type: Article

References (77)

1. For a chart listing Google acquisitions, see Scores.org, Google's Acquisition Appetite, http://www.scores.org/graphics/google/.
2. See also Chris Nerney, Another Google Acquisition, Another Antitrust Probe, IT WORLD, June 17, 2011, http://www.itworld.com/software/175401/another-google-acquisition-another-antitrust-probe.
3. Gregory J. Werden, Demand Elasticities in Antitrust Analysis, 66 ANTITRUST L.J. 387 (1998).
4. Eric Emch & T. Scott Thompson, Market Definition and Market Power in Payment Card Networks, 5 REV. NETWORK ECON. 45 (2006).
5. Daniel F. Spulber, Solving the Circular Conundrum: Communication and Coordination in Two-Sided Networks, 104 NW. U. L. REV. 537 (2010).
6. Daniel F. Spulber, Market Making by Price-Setting Firms, 63 REV. ECON. STUD. 559 (1996).
7. John Rust & George Hall, Middlemen versus Market Makers: A Theory of Competitive Exchange, 111 J. POL. ECON. 353 (2003).
8. Willie D. Jones, The Rare-Earth-Metal Bottleneck: China Produces Most of the World's Rare Earth Metals, and Soon It Will Need All That It Produces, IEEE SPECTRUM, Jan. 2010.
9. United States v. Nat'l Ass'n of Real Estate Bds., 339 U.S. 485 (1950).
10. Shira Ovide, Groupon: More Anti-Facebook Armor for Google, WALL ST. J., Nov. 30, 2010.
11. Amir Efrati & Pui-Wing Tam, Google Battles to Keep Talent, WALL ST. J., Nov. 11, 2010.
12. See DANIEL F. SPULBER, THE THEORY OF THE FIRM: MICROECONOMICS WITH ENDOGENOUS ENTREPRENEURS, FIRMS, MARKETS, AND ORGANIZATIONS (Cambridge Univ. Press 2009).
13. See Daniel F. Spulber, Should Business Method Inventions Be Patentable?, 3 J. LEGAL ANALYSIS 265 (2011).
14. George L. Priest, Flawed Efforts to Apply Modern Antitrust Law to Network Industries, in HIGH-STAKES ANTITRUST: THE LAST HURRAH? 117 (R. W. Hahn ed., AEI Brookings Joint Center for Regulatory Studies 2003).
15. George L. Priest, Rethinking Antitrust Law in an Age of Network Industries (John M. Olin Center for Studies in Law, Econ., and Public Pol'y, Research Paper No. 352, Yale Law School 2007).
16. For an overview of two-sided markets without network effects, see Daniel F. Spulber, Firms and Networks in Two-Sided Markets, in 1 HANDBOOK OF ECONOMICS AND INFORMATION SYSTEMS 137 (Terry Hendershott ed., Elsevier 2006).
17. David S. Evans, The Antitrust Economics of Multi-Sided Platform Markets, 20 YALE J. ON REG. 358 (2003).
18. Aviv Nevo, Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry, 31 RAND J. ECON. 395 (2000).
19. Minjae Song, Estimating Platform Market Power in Two-sided Markets with an Application to Magazine Advertising (University of Rochester, Working Paper, 2011)
20. For recent examples, see Matthew Weinberg, The Price Effects of Horizontal Mergers, 4 J. COMPETITION L. & ECON. 433 (2008).
21. Orley C. Ashenfelter, Daniel S. Hosken & Matthew Weinberg, Generating Evidence to Guide Merger Enforcement (NBER Working Paper Series, No. 14798, 2009).
22. David S. Evans & Michael D. Noel, The Analysis of Mergers that Involve Multisided Platform Businesses, 4 J. COMPETITION L. & ECON. 663 (2008).
23. David S. Evans & Michael D. Noel, Defining Antitrust Markets When Firms Operate Two-Sided Platforms, 2005 COLUM. BUS. L. REV. 667 (2005).
24. Julian Wright, One-sided Logic in Two-sided Markets, 3 REV. NETWORK ECON. 44 (2004).
25. Julian Wright, Determinants of Optimal Interchange Fees in Payment Systems, 52 J. INDUS. ECON. 1 (2004).
26. See also Lucy J. White, Market Definition and Market Power in Payment Card Networks: Some Comments and Considerations, 5 REV. NETWORK ECON. 61 (2006).
27. See Alexander White & E. Glen Weyl, Imperfect Platform Competition: A General Framework (NET Institute, Working Paper No. 10-17, 2010).
28. See also Joseph Farrell & Carl Shapiro, Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition, 10 B.E. J. THEORETICAL ECON. article 9 (2010).
29. Gregory J. Werden, A Robust Test for Consumer Welfare Enhancing Mergers Among Sellers of Differentiated Products, 44 J. INDUS. ECON. 409 (1996).
30. See Dennis W. Carlton, Revising the Horizontal Merger Guidelines, 6 J. COMPETITION L. & ECON. 619 (2010).
31. Richard Schmalensee, Should New Merger Guidelines Give UPP Market Definition?, Dec. 2009 COMPETITION POL'Y INT'L. 1 (2009) for further discussion of the UPP approach.
32. Marc Rysman, Competition Between Networks: A Study of the Market for Yellow Pages, 71 REV. ECON. STUD. 483 (2004).
33. Ambarish Chandra & Allan Collard-Wexler, Mergers in Two-Sided Markets: An Application to the Canadian Newspaper Industry, 18 J. ECON. & MGMT. STRATEGY 1045 (2009).
34. Elena Argentesi & Lapo Filistrucchi, Market Definition in a Two-Sided Market: The Case of Newspapers (University of Bologna Department of Economics Working Paper, 2010)
35. [246] U.S. 231 (1918).
36. See Tano Santos & José A. Scheinkman, Competition Among Exchanges, 116 Q. J. ECON. 1027 (2001).
37. Carmine Di Noia, Competition and Integration Among Stock Exchanges in Europe: Network Effects, Implicit Mergers and Remote Access, 7 EUR. FIN. MGMT. 39, 40 (2001).
38. See, e.g., R. Aggarwal & S. Dahiya, Demutualization and Public Offerings of Financial Exchanges, 18 J. APPLIED CORP. FIN. 96 (2006).
39. David Reiffen & Michel Robe, Demutualization and Customer Protection at Self-regulatory Financial Exchanges, 31 J. FUTURES MARKETS 126 (2011).
40. Michael J. De La Merced & Jack Ewing, German Börse in Talks to Buy the Big Board, N.Y. TIMES, Feb. 9, 2011, http://dealbook.nytimes.com/2011/02/09/nyse-euronext-and-deutscheborse-in-merger-talks/.
41. See Tom Arnold, Philip Hersch, J. Harold Mulherin & Jeffrey Netter, Merging Markets, 54 J. FIN. 1083 (1999).
42. Ulf Nielsson investigates how consolidation of exchanges has affected the market liquidity of securities traded on those exchanges: "The main motivation for studying liquidity is that it ultimately affects the cost of capital. For example, if trading volume of a particular stock is low, then the stock is harder to sell (e.g. in bear markets) and the bid-ask spread is typically high."
43. Ulf Nielsson, Stock Exchange Merger and Liquidity: The Case of Euronext, 12 J. FIN. MARKETS 229 (2009).
44. The basic two-sided Hotelling model is introduced in a reduced form in Spulber (1999), although he restricts attention to the case of equal numbers of customers and suppliers. A related literature includes vertical relationships and the outside option of search markets. Loertscher (2007) looks at duopoly competition between market makers in a spatial model when buyers and sellers have the option of search. We treat the possibility of search and/or direct contracting as a part of the outside option. For simplicity, we assume that this is never optimal for customers and suppliers; however, we could build this option in a similar way to Loertscher (2007) without changing the qualitative implications of our model. Note that positive markups can also be due to other factors including asymmetric information and imperfect incentives (see Spulber, 1999).
45. See Thomas Gehrig, Intermediation in Search Markets, 2 J. ECON. & MGMT. STRATEGY 97 (1993).
46. John Fingleton, Competition among Middlemen when Buyers and Sellers Can Trade Directly, 45 J. INDUS. ECON. 405 (1997).
47. Daniel F. Spulber, Market Microstructure and Incentives to Invest, 110 J. POL. ECON. 352 (2002).
48. Simon Loertscher, Horizontally Differentiated Market Makers, 16 J. ECON. & MGMT. STRATEGY 793 (2007).
49. Bernard Caillaud & Bruno Jullien, Chicken and Egg: Competition Among Intermediation Service Providers, 34 RAND J. ECON. 309 (2003).
50. See also Andrei Hagiu, Pricing and Commitment by Two-Sided Platforms, 37 RAND J. ECON. 720 (2006).
51. Markus Reisinger & Monika Schnitzer, A Model of Vertical Oligopolistic Competition (University of Munich, Working Paper, 2007)
52. Jiandong Ju, Scott C. Linn & Zhen Zhu, Middlemen and Oligopolistic Market Makers, 19 J. ECON. & MGMT. STRATEGY 1 (2010).
53. Leslie Marx & Greg Shaffer, Buyer Power, Exclusion, and Inefficient Trade (Duke University, Working Paper, 2008)
54. P. Esö, V. Nocke & L. White, Competition for Scarce Resources (Northwestern University, Working Paper, 2007).
55. A. Andrei Hagiu, Two-Sided Platforms: Product Variety and Pricing Structures, 18 J. ECON. & MGMT. STRATEGY 1011 (2009).
56. See Jean-Charles Rochet & Jean Tirole, Platform Competition in Two-Sided Markets, 1 J. EUR. ECON. ASS'N 990 (2003).
57. Jean-Charles Rochet & Jean Tirole, Two-Sided Markets: Where We Stand, 37 RAND J. ECON. 645 (2006).
58. Dale O. Stahl, Bertrand Competition for Inputs and Walrasian Outcomes, 78 AM. ECON. REV. 189 (1988).
59. See Harold Hotelling, Stability in Competition, 39 ECON. J. 41 (1929).
60. Steven C. Salop, Monopolistic Competition with Outside Goods, 10 BELL J. ECON. 141 (1979).
61. DANIEL F. SPULBER, MARKET MICROSTRUCTURE: DEALERS AND THE THEORY OF THE FIRM (Cambridge Univ. Press 1999).
62. Binding constraints change expected comparative statics in two-sided markets with network effects literature as well: for example, Liu and Serfes (2008) obtain a result that the expected comparative statics regarding price discrimination reverse once firms cannot set prices below zero
63. Qihongiu Liu & Konstantinos Serfes, Price Discrimination in Two-Sided Markets (NET Institute, Working Paper No. 07-25, 2008).
64. Suppliers (or customers) seeing firms as not differentiated simply means taking the corresponding differentiation parameter to zero. For example, we get the familiar p=t N result if workers only care about wages rather than travel costs.
65. See Sridhar Balasubramanian, Mail versus Mall: A Strategic Analysis of Competition Between Direct Marketers and Conventional Retailers, 16 MARKETING SCI. 155 (1998) for one-sided setup featuring Salop's circle and a mass-mailer.
66. Armstrong extends Spulber's 1999 two-sided Hotelling model by adding network effects and focuses on whether agents from either side of the market are forced to choose one of the platforms (single-home), while the other side multi-homes
67. Mark Armstrong, Competition in Two-Sided Markets, 37 RAND J. ECON. 668 (2006).
68. Armstrong shows that when one of the sides multi-homes (is able to choose more than one intermediary), then platforms extract all the surplus of the multi-home users, and maximize the joint surplus of the single-home users and the platforms (Armstrong's Proposition 4). The result holds because there is no competition for the multi-homing users. In our setting, the competitive bottleneck is the respective size of the two groups of users. If the group is not constrained, then there is no competition for that group, and thus its entire surplus is extracted, and the joint surplus of the constrained group and the intermediaries is maximized. In the competitive scenario (when the outside option does not bind), we obtain similar results to Armstrong's 2006 main results, without assuming network effects. Armstrong's model does not deliver either the intuition of reversed comparative statics with the outside option binding, or the possible switch of where the competitive bottleneck is, depending on the size of the group (the single-homing side is always the competitive bottleneck). Another insight derived from our model is that the key issue is not multi-homing versus single-homing, but rather the relative sizes of the groups. We could allow one of the sides to multi-home in our model. That would effectively multiply the size of the multi-homing group, since it's as if there are more users in this group. However, if even after this multiplication the group is smaller than the single-homing group, the intermediaries still compete for the smaller multi-homing group, while extracting the entire surplus from the single-homing group.
69. We relax the assumption on suppliers in the Appendix, allowing each supplier to deliver more units if the wage is higher. Our qualitative results do not change.
70. The customer-constrained equilibrium is available upon request
71. Alexei Alexandrov, Fat Products, 17 J. ECON. & MGMT. STRATEGY 67 (2008).
72. Suppliers located a distance of xw* from a firm would earn zero surplus from switching to a competing firm; those located further away would earn positive surplus from supplying to a competing firm. Thus, the supply function is steeper to the right of xw*. The equilibrium bid price is determined by the intersection of the supply function and the vertical line at S/N (since all suppliers are employed in equilibrium). Notice that W* and xw* are determined jointly: increasing W* would push xw* to the left. Similarly, since the equilibrium bid price does not depend on the reservation utility of suppliers, an increase in W must push xw* to the right. An increase in R increases the equilibrium bid price, and thus pushes xw* to the left.
73. This property holds in general for any model of market making. This is readily verified in our setting where the market maker always fully extracts the surplus of the unconstrained side, a = R, so that the bid price is b = a - ρ = R - ρ.
74. See Daniel F. Spulber, Firms and Networks in Two-Sided Markets, 1 HANDBOOK OF ECONOMICS AND INFORMATION SYSTEMS 137 (Terry Hendershott ed., Elsevier 2006).
75. Just as in the base case, we leave out the case of N local matchmakers
76. As in the proof of Propositions 1 and 2, we need to ensure that the outside option is not binding. The utility of the worst off employee, that is, the one located S 2N from the nearest headhunter, is This needs to be bigger than W. This is equivalent to N > (5/4)N0.
77. Skipped steps from the derivation: which implies which yields