nr 024 - A Note on Social Welfare and Cost Recovery in Two-Sided Markets
- DNB Working Papers
-
Date 30 December 2004
Using a simple model of two-sided markets, we show that, in the
social optimum, platform pricing leads to an inherent cost recovery
problem. This result is driven by the positive externality of
participation that users on either side of the market exert on the
opposite side. The contribution of this positive externality to
social welfare leads the social planner to increase users’
participation by setting prices at both sides of the market such
that the total price is below marginal cost. This causes
operational losses for the platform. Our result holds for both
interior pricing and skewed pricing in two-sided markets. Keywords:
Two-sided markets, social optimum, cost recovery, operational
losses. JEL Codes: G21, L10, L41