Pricing of Platforms in Two-Sided Markets with Heterogeneous Agents and Limited Market Size
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This paper studies equilibrium in a two-sided market represented by network platforms and heterogeneous agents. The setup below is based on the Armstrong monopoly model suggested in 2006 under the following assumptions: (1) a continuum of agents of limited size on each side of the market and (2) the heterogeneous utility of agents with the Hotelling specification. We show that the monopoly’s optimal pricing strategy always results in a corner solution in terms of the equilibrium market share. In addition, we solve the social planner’s optimization problem, obtaining a similar corner solution. Finally, we find the exact values for the equilibrium in the case of duopoly in a two-sided market with two platforms.
Keywordsplatform network externalities social optimum heterogeneous agents two-sided markets Hotelling specification
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The authors are grateful to Jaimie W. Lien, Xinhong Hu, and Xinhan Zhang for careful reading of the manuscript and helpful remarks.
This work was supported by Tsinghua University, project no. 20151080397, the National Natural Science Foundation of China, project no. 61661136002, and the Russian Foundation for Basic Research, project no. 16-51-55006.
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