Areeda–Turner in Two-Sided Markets

Review of Industrial Organization, Apr 2015

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.

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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)


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Stefan Behringer, Lapo Filistrucchi. Areeda–Turner in Two-Sided Markets, Review of Industrial Organization, 2015, pp. 287-306, Volume 46, Issue 3, DOI: 10.1007/s11151-015-9460-5