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,Competition Policy in Two-Sided Markets,-Some brief remarks,Dr Amelia Fletcher,Chief Economist,Office of Fair Trading,LEAR Conference7th June 2007,NB The views expressed here are my own,and not necessarily those of the OFT,What do certain key factors of 2-sided markets mean for:,Market definition?,Predation?,Collusion?,Exclusive contracts?,Media regulation and mergers?,2-sided markets:First key factor,In a typical 2-sided market:,D,A,is function not only of,p,A,but also of,q,B,D,B,is function not only of,p,B,but also of,q,A,What does this mean for market definition?,Market definition,SSNIP test:,Could a hypothetical monopolist profitably sustain a small but significant and non-transitory increase in price?,If no,the relevant antitrust market must be wider,If yes,the market is not any wider(but could be narrower),Key question for 2-sided markets:,Which feedback loops should be taken into account?,Market definition:Feedback loops,p,A,q,A,A,A,A,Normal Market:,Does total,A,?,If yes,market no wider,?,Market definition:Feedback loops,p,A,q,A,D,B,q,B,A,A,B,For given p,B,A,Normal Market:,Does total,A,?,If yes,market no wider,Feedback,to market B,Market definition:Feedback loops,p,A,q,A,D,B,q,B,A,A,B,For given p,B,A,Normal Market:,Does total,A,?,If yes,market no wider,Feedback,to market B,Should we take this,into account?,Market definition:Feedback loops,p,A,q,A,D,B,q,B,D,A,q,A,A,A,B,A,For given p,B,For given p,A,A,Normal Market:,Does total,A,?,If yes,market no wider,Feedback,to market A,Feedback,to market B,Market definition:Feedback loops,p,A,q,A,D,B,q,B,D,A,q,A,A,A,B,A,For given p,B,For given p,A,A,Normal Market:,Does total,A,?,If yes,market no wider,Feedback,to market A,Feedback,to market B,Should we take this,into account?,Market definition:Feedback loops,p,A,q,A,D,B,q,B,D,A,q,A,A,A,B,A,For given p,B,For given p,A,A,Normal Market:,Does total,A,?,If yes,market no wider,p,B,q,B,B,Profits,dissipated,in market B,Feedback,to market A,Feedback,to market B,Should we take this,into account?,Market definition:Feedback loops,p,A,q,A,D,B,q,B,D,A,q,A,A,A,B,A,For given p,B,For given p,A,A,Normal Market:,Does total,A,?,If yes,market no wider,p,B,q,B,B,D,A,q,A,A,Profits,dissipated,in market B,Feedback,to market A,Feedback,to market A,Feedback,to market B,Market definition:Feedback loops,p,A,q,A,D,B,q,B,D,A,q,A,A,A,B,A,For given p,B,For given p,A,A,Normal Market:,Does total,A,?,If yes,market no wider,p,B,q,B,B,D,A,q,A,A,Profits,dissipated,in market B,Feedback,to market A,Feedback,to market A,Feedback,to market B,Market definition:Feedback loops,p,A,q,A,D,B,q,B,D,A,q,A,A,A,B,A,For given p,B,For given p,A,A,Normal Market:,Does total,A,?,If yes,market no wider,p,B,q,B,B,D,A,q,A,A,Profits,dissipated,in market B,Feedback,to market A,Feedback,to market A,Feedback,to market B,2-sided markets:Second key factor,p,A,will tend to be lower when either:,each additional buyer in market A generates significant extra revenue in market B;or,it is hard to persuade market A buyers to sign up.,More formally(,Rochet,&Tirole,2006):,price cost,=,1,.,price elasticity of demand,If cost increases(due to lower revs in other market),then so will price(The waterbed effect),Predation and excessive pricing,In a two-side market,we may typically observe:,Prices below marginal cost on one side of a market;and,Prices well above marginal cost on the other,Such pricing is an efficient response to network externalities.,Competition authorities need to be aware of this when assessing predation or excessive pricing,We also need to be aware of the waterbed effect,when imposing remedies,However,This does not mean predation(and excessive pricing)doesnt occur,For example,what if pricing structure affects market structure?,Specifically,what if pricing low on one side of a market prevents entry into both sides?,Can such a pricing structure increase,tippability,of already,tippable,markets?,But how to assess?,A careful approach is needed,Low pricing on one side of a two sided market can be exclusionary,But application of simple,Akzo,type test for predation(,ie,is P AAC?)problematic,A possible approach?,to apply an,Akzo,type test,but,to employ an opportunity cost benchmark,Collusion on one side of the market,True that increased profits from collusion on one side of a market get competed away on the other,Does this justify a,laissez faire,approach?,No!,Not all additional profits are competed away,Prices typically,even,higher than without collusion,suggesting inefficient price asymmetry,But it does make it difficult to determine appropriate exemption criteria where relevant,2-sided markets:Third key factor,2-sided markets are often,tippable,Often observe competition for the market,This competition can get rough but should competition authorities intervene?,After all a monopoly anyway,Does it matter who wins?,Yes!And best for both consumers and dynamic competition if the best product wins,2-sided markets:Fourth key factor,The,tippability,of 2-sided markets is reduced if there
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