Areeda–Turner in Two-Sided Markets
Rev Ind Organ
Areeda-Turner in Two-Sided Markets
Stefan Behringer 0 1 2
Lapo Filistrucchi 0 1 2
JEL Classification 0 1 2
0 CentER and TILEC, Tilburg University , Tilburg , The Netherlands
1 Department of Economics and Management, University of Florence , Via delle Pandette 9, 50127 Florence , Italy
2 Mercator School of Management, Universita t Duisburg-Essen, LS Allgemeine Volkswirtschaftslehre , Lotharstrasse 65, 47057 Duisburg , Germany
We extend the Areeda-Turner rule to two-sided markets. We show that a two-sided monopolist may find it short-run profit-maximizing to charge a price below marginal cost on one side of the market. Hence showing that the price is below marginal cost on one side of a two-sided market cannot be considered a sign of predation. We then argue for a two-sided Areeda-Turner rule that takes into account price-cost margins on both sides of the market. Two examples highlight that applying a one-sided Areeda-Turner rule may lead one to assess legitimate prices as predatory or to consider predatory prices as legitimate.
Daily newspapers; Two-sided markets
1 Introduction
In this paper, we extend the AreedaTurner rule to two-sided markets. We do so by
following the original logic of Areeda and Turner (1975). In their seminal article,
the authors set out to identify a rational dividing line between legitimately
competitive prices and prices that should be regarded as predatory. Adopting the
classical definition of predation as the deliberate sacrifice of present revenues for the
purpose of driving rivals out of the market and then recouping the losses, they
proposed that [u]nless at or above average cost, a price below reasonably
anticipated (1) shortrun marginal costs or (2) average variable costs should be
deemed predatory, and the monopolist may not defend on the grounds that his price
was promotional or merely met an equally low price of a competitor. In addition
[r]ecognizing that marginal cost data are typically unavailable they concluded
that [a] price below reasonably anticipated average variable cost should be
conclusively presumed unlawful.1
Following the original logic of Areeda and Turner (1975), we seek a threshold for
the price, such that a price below this threshold should be deemed predatory. We
argue that such a threshold needs to take into account the specificity of two-sided
markets. In these markets firms act as platforms and sell two different products or
services to two distinct groups of customers.2 An example is the newspaper market,
in which publishers sell content to readers and advertising slots to advertisers.
A two-sided market is further characterised by indirect network externalities
between the two groups of users. These arise when the utility (or the profits)
obtained by a customer (whether a final consumer or a firm) of one group depends
on the number of customers of the other group and the two groups of customers do
not internalise these externalities.3
In the case of newspapers, advertisers place a greater value on advertising in a
given newspaper the more readers the newspaper has. Readers may or may not be
affected by the amount of advertising in the newspaper,4 but for the market to be
two-sided already the presence of one indirect network effect is sufficient.5
Whereas customers do not internalize the externality (or externalities) above,
two-sided platforms do internalize it (them) when deciding their optimal pricing
1 Areeda and Turner (1975, p. 733).
2 See Caillaud and Jullien (2001, 2003), Rochet and Tirole (2002, 2003, 2006), Evans (2003), Parker and
Alstyne (2005) and Armstrong (2006).
3 As a result, a two-sided platform is different from a firm that sells complementary products. Indeed in
the latter case there is only one group of customers who typically buy both goods (e.g. the ink-jet printer
and the ink-jet cartridge) and thus, unless they are naive, they respond to changes in the prices of both. In
a newspaper market, instead, a reader does not care about the price charged to advertisers and vice versa
advertisers do not decide whether to place an ad in a newspaper based on the cover price of the latter.
4 Empirical evidence so far seems to suggest that on average readers of daily newspapers are either
indifferent to or slightly like advertising (which is usually not targeted but avoidable). See Argentesi and
Filistrucchi (2007), Fan (2013) and Filistrucchi et al. (2012). Readers of magazines seem instead to attach
a positive value to advertising (which is avoidable and more targeted). See Kaiser and Wright (2006) and
Kaiser and Song (2009).
5 See Filistrucchi et al. (2013).
strategies. As a result, the profit-maximizing prices by two-sided platforms may be
very different from those charged by firms in one-sided markets.
As pointed out by Rochet and Tirole (2006), in a two-sided market, where two
products or services are sold to two groups of customers, one can distinguish the
price level from the price structure. The pr (...truncated)