Competition Policy in Two-Sided Markets - Some brief remarks

Competition Policy in Two-Sided Markets- Some brief remarks

Dr Amelia FletcherChief EconomistOffice of Fair Trading

LEAR Conference7th June 2007

NB The views expressed here are my own, and not necessarily those of the OFT

What do certain key factors of 2-sided markets mean for:

Market definition?

Predation?

Collusion?

Exclusive contracts?

Media regulation and mergers?

2-sided markets: First key factor In a typical 2-sided market:

DA is function not only of pA but also of qB

DB is function not only of pB but also of qA

What does this mean for market definition?

Market definition

SSNIP test:

Could a hypothetical monopolist profitably sustain a small but significant and non-transitory increase in price?

If no, the relevant antitrust market must be wider

If yes, the market is not any wider (but could be narrower)

Key question for 2-sided markets:

Which feedback loops should be taken into account?

Market definition: Feedback loops

pA↑ qA↓

πA↑ πA↓

πA↑

Normal Market:Does total πA↑?

If yes, market no wider

?


pA↑ qA↓ DB↓ qB↓

πA↑ πA↓ πB↓

For given pB

πA↑



Feedback to market B


pA↑ qA↓ DB↓ qB↓

πA↑ πA↓ πB↓

For given pB

πA↑




Should we take this

into account?


pA↑ qA↓ DB↓ qB↓ DA↓ qA↓

πA↑ πA↓ πB↓ πA↓

For given pB For given pA

πA↑



Feedback to market A






πA↑





Should we take this

into account?





πA↑



pB↓ qB↑

πB↓

Profits dissipated in market B



Should we take this

into account?





πA↑



pB↓ qB↑

πB↓

DA↑ qA↑

πA↑

Profits dissipated in market B




2-sided markets: Second key factor pA will tend to be lower when either:

each additional buyer in market A generates significant extra revenue in market B; or

it is hard to persuade market A buyers to sign up.

More formally (Rochet & Tirole, 2006):

price – ‘cost’ = 1 . price elasticity of demand

If ‘cost’ increases (due to lower revs in other market), then so will price (The ‘waterbed effect’)

Predation and excessive pricing In a two-side market, we may typically

observe:

Prices below marginal cost on one side of a market; and

Prices well above marginal cost on the other

Such pricing is an efficient response to network externalities.

Competition authorities need to be aware of this when assessing predation or excessive pricing

We also need to be aware of the ‘waterbed effect’, when imposing remedies

However…

This does not mean predation (and excessive pricing) doesn’t occur

For example, what if pricing structure affects market structure?

Specifically, what if pricing low on one side of a market prevents entry into both sides?

Can such a pricing structure increase ‘tippability’ of already ‘tippable’ markets?

But how to assess?

A careful approach is needed Low pricing on one side of a two sided

market can be exclusionary

But application of simple Akzo type test for predation (ie is P < AAC?) problematic

A possible approach?

to apply an Akzo type test, but

to employ an ‘opportunity cost’ benchmark

Collusion on one side of the market True that increased profits from collusion on

one side of a market get competed away on the other

Does this justify a laissez faire approach?

No! Not all additional profits are competed away

Prices typically even higher than without collusion, suggesting inefficient price asymmetry

But it does make it difficult to determine appropriate exemption criteria where relevant

2-sided markets: Third key factor 2-sided markets are often ‘tippable’

Often observe competition ‘for’ the market

This competition can get rough – but should competition authorities intervene?

After all – a monopoly anyway

Does it matter who wins?

Yes! And best for both consumers and dynamic competition if the best product wins

2-sided markets: Fourth key factor The ‘tippability’ of 2-sided markets is

reduced if there is multi-homing on one (or both) side of the market

A move to single-homing by a relatively small part of the previously multi-homing side of the market can sometimes have major effects.

The effect of single-homing

Buyer 1 Platform A

Seller 1

Buyer 2 Platform B

Seller 2

Exclusivity contracts

Assessment of exclusivity contracts (or refusal to supply) is complicated in ‘tippy’ markets:

Small scale coverage could ‘tip’ the balance

Interesting that customers do better by being ‘single homing’ under profit-maximising pricing

So no need for profit sacrifice to ‘bribe’ customers to sign exclusive contracts or to refuse to supply

Could ‘multi-homing be a remedy?

2-sided markets: Fifth key factor The advertising funded nature of media can

result in imperfect product/political diversity

For media regulators:

This clearly provides a microeconomic justification for some form of regulatory intervention

But how to decide ‘what is welfare optimal’ in real life?

For competition authorities:

Does it suggest a need to think about wider ‘public interest’ issues when assessing media mergers?

Competition Policy in Two-Sided Markets- Some brief remarks

Dr Amelia FletcherChief EconomistOffice of Fair Trading

LEAR Conference7th June 2007

NB The views expressed here are my own, and not necessarily those of the OFT

Competition Policy in Two-Sided Markets - Some brief remarks

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