DP14406 Exclusionary Pricing in Two-Sided Markets

Author(s): Andrea Amelio, Liliane Karlinger, Tommaso Valletti
Publication Date: February 2020
Keyword(s): Exclusionary practices, externalities, limit pricing, platforms, two-sided markets
JEL(s): D40, L13, L41
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14406

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.