t wo -s ided p latforms : u nderstanding the m echanism and e xploring o pportunities for d ata a...
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TWO-SIDED PLATFORMS: UNDERSTANDING THE MECHANISM AND EXPLORING OPPORTUNITIES FOR DATA ANALYSIS
Takanori Adachi
School of Economics, Nagoya University
May 19, 2015
INTRODUCTION
I’m going to talk about economic principles to understand the characteristics of “places” where online transactions take place.
“Two-sided Platforms”
I’m not going to talk about the relationship to data analysis in details.
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ROADMAP
1. What are two-sided platforms?
- Cross-group externalities
2. Understanding the mechanism
- Pricing in the presence of cross-group externalities
3. Connection to data analysis3
1. WHAT ARE TWO-SIDED PLATFORMS? Digitalization: Many economic transactions take place online.
(1) Transactions are digitally recorded.
Opportunities for researchers “Big data”
(2) “Places” are also digital.
Virtual places can be understood as “platforms.” 4
1. WHAT ARE TWO-SIDED PLATFORMS?
Platforms: “Places” where two groups interact.
Example: Search engines Compete
Google Yahoo Platform Side/Group Users Advertisers
Cross-group externalities (“I am happier if there are more and more people on the other side.”)
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Other examples of two-sided platforms (roughly in chronological order):
- OS - Video Games Internet Age! - E-commerce sites - (Celebrities’) Blogs - Broadcasting/Video platforms (YouTube, Ustream, etc.) - SNS （ Facebook, twitter, LINE, Instagram, etc. ） - Smartphones - E-books - Mediation services such as Uber, Airbnb, online dating, etc. - More to come…? - Newspapers, Magazines, TVs, Radios - Credit Cards - Shopping Malls (- Street Markets?)
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In many cases, “free” on one side.
Platform Free ！ Charging fees
Side A Side B Compensated Side Profiting Side Cross-subsidization Be brave to make a drastic contrast. “ Make a loss to get more profits!”
Not necessarily because the cost is almost zero.
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2. UNDERSTANDING THE MECHANISM We’ll see that in the presence of cross-group
externalities, “discriminatory” treatment by platforms is not as harmful as in the situation without externalities.
This result is highlighted if the costs for both groups are the same.
We look at the following story of “discriminatory pricing” based on:
Adachi, T. 2002. “A Note on “Third-Degree Price Discrimination with Interdependent Demands”,” Journal of Industrial Economics, Vol. 50, No. 2
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Consider the following two groups.
Faculty Students
40 30
30 20
20 10
Software Developer 9
Usually, if you and somebody purchase exactly the same product from the same seller, you and he/she pay the same price.
Sometimes, not. “Price Discrimination”
First, we compare price discrimination with uniform pricing without cross-group externalities.
Then, we introduce cross-group externalities. 10
(1) Uniform pricing (UP)
Under UP, the platform’s profits are:
11
More on pricing under uniform pricing:
Price Change 51
Price Change 35
The software vendor chooses price 20. The vendor’s profit = 85
12
Consumers’ “satisfaction” under uniform pricing:
Faculty Students
= 20 = 10
= 10 = 0
10 0
= 0
Price 20
Software Developer
Total: 30 (Faculty) + 10 (Students)
= 40
13
In sum,
14
UniformPricing
Aggregate Consumer Surplus
40
Vendor’s Profit 85
Sum（ “ Social Welfare”）
125
(2) Price discrimination (PD)
Under PD, the vendor’s profits are:
15
Now, the vendor can separate the two groups.
- For the faculty group,
Price Change 81
- For the student group,
Price Change 14
16
Under price discrimination, the seller can charge a higher price for the faculty group (30) without changing the price for the student group.
The software vendor chooses: price 30 for the faculty group price 20 for the student group
The vendor’s profit = 88 17
Consumers’ “satisfaction” under price discrimination:
Faculty Students
= 10 = 10
= 0 = 0
0 10 0
Price Price
30 20
Software Developer
Total: 10 (Faculty) + 10 (Students)
= 20
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Therefore,
Vendor’s profit is higher under PD. However, consumer surplus is higher under UP.
Price discrimination works as the firm’s attempt to exploit more of consumer surplus.
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UniformPricing
PriceDiscriminatio
nAggregate Consumer Surplus
40 20
Vendor’s Profit 85 88
Sum（ “ Social Welfare”）
125 108
Faculty
40 10 0 30 20 10 20
3
1 2 3
20
In general,
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Exercise (a):
Faculty Students
40 30
30 20
20 10 15
Uniform price is still 20. However, the vendor now cuts the price for the student group (30 for the faculty and 15 for the students).
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In general, it is known that:
If the number of consumers is lower or the same under price discrimination, then social welfare is lower.
Bertoletti, P. 2004. “A Note on Third-Degree Price Discrimination and Output,” Journal of Industrial Economics, Vol. 52, No. 3 23
Now, let’s modify the setting to consider “cross-group externalities”.
If one student uses the software,
Faculty
42 40
32 30
22 20 24
Similarly,
If two students use it, If three students use it,
Faculty Faculty
44 46
34 36
24 2625
Students are also in the same situation:
If one prof uses it: two three Students Students Students
31 30 32 33
21 20 22 23
11 10 12 1326
(1) Uniform pricing (UP)
The software vendor’s pricing under the uniform pricing:
Faculty Students
44 33
34 23 Three Two students members 24 13 purchase. purchase. Price 23 Software Vendor
27
Compare with the case of no cross-group externalities:
Without With Faculty Students Faculty Students
40 30 44 33
30 20 34 23 20 10 24 13 Price 20 Price 23
28
Why the software is not sold to all consumers: Faculty Students
46 33
36 23 26 13
Price Change 120
29
Consumers’ “satisfaction” under uniform pricing:
Faculty Students = 21 = 10 = 11 = 0 13 0 = 1
Price 23 Software Developer
Total: 33 (Faculty) + 10 (Students) = 43
30
In sum,
31
UniformPricing
Aggregate Consumer Surplus
43
Vendor’s Profit 100
Sum（ “ Social Welfare”）
143
(2) Price discrimination (PD)
Now, the seller can raise the price for the faculty group without lowering the price for the student group.
UP PD Faculty Students Faculty Students Price: 23 Price: 24 Price: 23 = 21 = 10 = 20 = 10 = 11 = 0 = 10 = 0 13 0 = 1 = 0 = 0
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Therefore,
. 33
UniformPricing
PriceDiscriminatio
nAggregate Consumer Surplus
43 40
Firm’s Profit 100 103
Sum（ “ Social Welfare”）
143 143
In summary, With no cross-group externalities,
With cross-group externalities,
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UniformPricing
PriceDiscriminatio
nAggregate Consumer Surplus
40 20
Vendor’s Profit 85 88
Sum （ “ Social Welfare”）
125 108
UniformPricing
PriceDiscriminatio
nAggregate Consumer Surplus
43 40
Firm’s Profit 100 103
Sum（ “ Social Welfare”）
143 143
This example shows that in the presence of cross-group externalities, Bertoletti’s (2004) claim,
If the number of consumers is lower or the same under price discrimination, then social welfare is lower.
no longer holds.
In the presence of cross-group externalities, “discriminatory” treatment by platforms is not as harmful as in the situation without externalities.
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Now, suppose that students get more benefits from the usage of professors.
If one prof uses it: two three Students Students Students
32 30 34 36
22 20 24 26
12 10 14 16
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(1) Uniform pricing (UP)
The software vendor’s pricing under the uniform pricing:
Faculty Students
44 36
34 26 Three Two students members 24 16 purchase. purchase. Price 24 Software Vendor
37
Compare with the case of no cross-group externalities:
Without With Faculty Students Faculty Students
40 30 44 36
30 20 34 26 20 10 24 16 Price 20 Price 24
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Why the software is not sold to all consumers: Faculty Students
46 36
36 26 26 16
Price Change 126
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Consumers’ “satisfaction” under uniform pricing:
Faculty Students = 20 = 12 = 10 = 2 10 0 = 0
Price 24 Software Developer
Total: 30 (Faculty) + 14 (Students) = 44
40
In sum,
41
UniformPricing
Aggregate Consumer Surplus
44
Vendor’s Profit 105
Sum（ “ Social Welfare”）
149
(2) Price discrimination (PD)
Now, the seller lowers the price for the student group to raise the price for the faculty group.
UP PD Faculty Students Faculty Students Price: 24 Price: 26 Price: 16 = 20 = 12 = 20 = 20 = 10 = 2 = 10 = 10 10 0 = 0 = 0 = 0
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Therefore,
. 43
UniformPricing
PriceDiscriminatio
nAggregate Consumer Surplus
44 60
Firm’s Profit 105 108
Sum（ “ Social Welfare”）
149 168
Software Vendor
Faculty Student Profiting Side Compensated Side Cross-subsidization “ Make a loss to get more profits!”
In the presence of cross-group externalities, the conflict between the vendor and student group is mitigated.
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In summary, With no cross-group externalities,
With cross-group externalities (1),
With cross-group externalities (2),
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Uniform Price DisCons Surplus 40 20Profit 85 88Social Welfare
125 108
Uniform Price DisCons Surplus 43 40Profit 100 103Social Welfare
143 143
Uniform Price DisCons Surplus 44 60Profit 105 108Social Welfare
149 168
Prices are:
Average price 20 25
23 23.6
24 2146
UniformPricing
Price Discrimination
Without 20 30 20
Externalities (5 people) (2 profs) (2 students)
With 23 24 23
Externalities (1)
(5 people) (3 profs) (2 students)
With 24 26 16
Externalities (2)
(5 peole) (3 profs) (3 students)
In summary,
In the presence of cross-group externalities, “discriminatory” treatment by platforms is not as harmful as in the situation without externalities.
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Exercise (b):
Faculty Students
43 42 41 40 30 32 34 36
33 32 31 30 20 22 24 26
23 22 21 20 10 12 14 16
It turns out that social welfare is now lower under price discrimination.
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3. CONNECTION TO DATA ANALYSIS A lot of opportunities for data analysis.
Existing studies: Magazines/Newspapers, Video games, …
In many web-based platforms, transactions are digitally recorded.
- Transactions on both sides - High frequency (“Big” data) - User demographics (Privacy concerns) 49
Ex: Effectiveness of Targeted Advertising Rival Competition Internet Portal (prod differentiation)
Visit (free) Ads & fee
Users/Consumers Advertisers Not only Size but Purchase? Composition wouldHeterogeneity be also important. 50
HOMEWORK (DUE: MAY 26)
1. Propose a possible research issue in relation to today’s topic, and describe how you can obtain data for it.
2. Describe how today’s topic is related to your own research agenda.
English.
Send your work to: (undisclosed in this online version)
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THANK YOU!
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