Pricing distortions in multi-sided platforms

We consider the reasons why a monopoly multi-sided platform may price differently from a social planner. The existing literature has focused only on the classical market power distortion and a distortion in the spirit of Spence. We show two additional distortions appear in the presence of cross-group network effects, which we call the displacement distortion and the scale distortion. We show conditions under which the displacement distortion exactly offsets the Spence distortion, and provide an example in which the total of these different distortions results in monopoly prices per user that are lower than the social planner's on both sides. Our results have implications for regulatory policy, which we briefly discuss. (C) 2021 Elsevier B.V. All rights reserved.

Automated summary

This study explores that in the presence of cross-group network effects, a monopoly multi-sided platform may price differently than a social planner due to displacement distortion and scale distortion in addition to classical market power distortion and a distortion in the spirit of Spence. It is found that under certain conditions, the displacement distortion exactly offsets the Spence distortion, leading to lower monopoly prices per user compared to the social planner. These findings have implications for regulatory policy, which are briefly discussed.