er side (Evans, 2002, p.40; Schiff, 2007, p.21).
The intricacies of this kind in two-sided markets cause that regulation policies for these markets contain intricacies. In a simple one-sided market, the only thing that the regulatory authority has to do to be able to maximize the welfare of society is to equalize the marginal cost to the price. The way to follow by the regulator in order to do this is to have full knowledge of the costs of the firms. However, this is not sufficient for two-sided markets. First of all, it is impossible to equalize the prices in both sides of the market to the marginal cost due to the asymmetric structure of the pricing. Therefore, as well as the cost structure of the regulator, it should know the demands of the sides in the market (Schiff, 2007, pp.21-22).
Pricing Strategies in Two-Sided Markets
a. Elasticity of Demand
The elasticity of demand is a measure of the degree of the sensitivity of consumers towards the changes in price. One of the most important factors that determine the pricing strategy in two-sided markets is the elasticity of demand because in two-sided markets, the platform providers can expand the scale of the platform with their pricing based on the elasticity of demand. Accordingly, the side with more elasticity of demand accesses the goods and services at a lower price so that it creates the maximum benefit in the other side. Maximum benefit means that provision of more contribution of the side that is charged lower increases the value of the other side. The reason for this effect is created by the side that pays less is the positive network externality. While increase in the elasticity of demand of the side in the market lowers the price, decrease in the elasticity of demand increases the price (Bolt and Tieman, 2005, p.1).
b. Indirect Network Externalities
Another determinant of pricing policy in two-sided markets is indirect network externalities. In two-sided markets, the party that takes advantage of indirect network effects more, pays more. For example, in yellow pages case readers can access other useful information, even if there is no
advertising. But, advertisers cannot gain benefit in the absence of reader (Gündüz, 2009, p.16).
c. Platform Competition and Multi-Homing
The existence of a competitive platform in two-sided markets has significant consequences on the price level. Realization of the prices at a lower level in a competitive market compared to the non-competitive markets such as natural monopoly is a generally accepted rule in economics because firms in a competitive market price will avoid of increasing the price (Weyl, 2006, p.8-9).
In two-sided markets it is accepted that the competition reduces the level of price in the same way. But in this case the price range in sides is more important than the price level in two-sided markets. Because, even if the platform lead to a decline in the general level of competitive prices, in order the market to be successful, the competition in both sides of the market must be fully provided.
If there is a more intense competition in one side of the market compared to the other side, the price distribution deteriorates against the competitive side with less price range. As a result it is not clear that the competition of the platform will lead to effective price structure (Rochet and Tirole, 2008, p.550; Weyl, 2006,
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