Working Paper: CEPR ID: DP14406
Authors: Andrea Amelio; Liliane Karlinger; Tommaso Valletti
Abstract: This paper studies the incentives to engage in exclusionary pricing in the context of two-sided markets. Platforms are horizontally differentiated, and seek to attract users of two groups who single-home and enjoy indirect network externalities from the size of the opposite user group active on the same platform. The entrant incurs a fixed cost of entry, and the incumbent can commit to its prices before the entry decision is taken. The incumbent has thus the option to either accommodate entry, or to exclude entry and enjoy monopolistic profits, albeit under the constraint that its price must be low enough to not leave any room for an entrant to cover its fixed cost of entry. We find that, in the spirit of the literature on limit pricing, under certain circumstances even platforms find it profitable to exclude entrants if the fixed entry cost lies above a certain threshold. By studying the properties of the threshold, we show that the stronger the network externality, the lower the thresholds for which incumbent platforms find it profitable to exclude. We also find that entry deterrence is more likely to harm consumers the weaker are network externalities, and the more differentiated are the two platforms.
Keywords: two-sided markets; platforms; externalities; exclusionary practices; limit pricing
JEL Codes: D40; L13; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stronger network externalities (D85) | lower thresholds for incumbents to engage in exclusionary practices (L49) |
| stronger network externalities (D85) | increased likelihood of exclusionary behavior (C92) |
| entry deterrence (K42) | reduced consumer welfare (D69) |
| weaker network externalities (D85) | increased likelihood of entry deterrence (L49) |
| fixed entry costs and strength of network externalities (D85) | entry deterrence (K42) |