Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/266520 
Year of Publication: 
2020
Series/Report no.: 
JRC Digital Economy Working Paper No. 2020-14
Publisher: 
European Commission, Joint Research Centre (JRC), Seville
Abstract: 
The static model of two sided markets proposed by Rochet and Tirole analyses optimal pricing of a monopolistic platform at the equilibrium point. Their framework implicitly assumes that for each prices set by the platform, the equilibrium number of users on each side will be unique. However, under general conditions, the uniqueness of market equilibrium is not guaranteed. Optimal static prices do not ensure convergence to the preferred full market outcome, as platform may face failure-to-launch or failure-to-grow problems. Hence, to study problems around multiplicity of equilibria, a different framework is required. We propose a dynamic model of monopolistic platform and demonstrate the effects of different dynamic pricing strategies for equilibrium selection and convergence. The main conclusion from the study is that emerging platform can reach the preferred equilibrium by using tariffs with subsidies for early stage users. We give examples of dynamically adjusting tariffs that minimize subsidies. Finally, the dynamic setting reveals a trade-off between the platform profits and social welfare, related to the speed of user base growth.
Subjects: 
two-sided markets
dynamic pricing
multiplicity of equilibria
dynamic system
online platforms
JEL: 
C61
D42
L12
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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