128 - Microfoundations of Two-sided Markets: The Payment Card Example

DNB Working Papers
Date 18 January 2007

This paper provides a theory of two-sided market dynamics with arguably better microfoundations. These alternative microfoundations focus on observable heterogeneities of both sides of the market in a competitive framework. The theory is rich in empirical predictions and is less dependent on a particular form of imperfect competition than other approaches. Our findings in the payment card example point to adoption costs and the distribution of consumer incomes and firm sizes as the key determinants of the shares of costs borne by each side. This result provides clear implications for industry dynamics and sheds light on the puzzle of asymmetric pricing. Keywords: Technology Adoption, Two-sided Market, Asymmetric Pricing JEL Classification: L10, D40, O30