Experimentation in Two-Sided Markets

Sven Rady, Martin Peitz and Piers Trepper

No 8670, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study optimal experimentation by a monopolistic platform in a two-sided market framework. 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 externalities are of approximately equal strength. If the externality that one side exerts is sufficiently 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 policy 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.

Keywords: Bayesian learning; Monopoly experimentation; Network effects; Optimal control; Two-sided market (search for similar items in EconPapers)
JEL-codes: D42 D83 L12 (search for similar items in EconPapers)
Date: 2011-11
New Economics Papers: this item is included in nep-com and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Experimentation in Two-Sided Markets (2017)
Working Paper: Experimentation in Two-Sided Markets (2017)
Working Paper: Experimentation in Two-Sided Markets (2015)
Working Paper: Experimentation in Two-Sided Markets (2013)
Working Paper: Experimentation in Two-Sided Markets (2011)
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