Competition and Collusion in Two-Sided Markets with an Outside Option

TL;DR

This paper develops pricing formulas for two-sided markets with outside options, analyzing how competition and collusion affect prices, consumer surplus, and market participation under various externalities and market sizes.

Contribution

It introduces new pricing formulas for two-sided markets with outside options and compares the effects of competition and collusion under different externalities.

Findings

Prices and consumer surplus can increase or decrease with outside option utility.

Collusion decreases utilities and market participation in cases of small externalities.

Market participation increases with more platforms, profits vary with utility levels.

Abstract

We introduce pricing formulas for competition and collusion models of two-sided markets with an outside option. For the competition model, we find conditions under which prices and consumer surplus may increase or decrease if the outside option utility increases. Therefore, neglecting the outside option can lead to either overestimation or underestimation of these equilibrium outputs. Comparing collusion to competition, we find that in cases of small cross-side externalities, collusion results in decreased normalized net deterministic utilities, reduced market participation and increased price, on both sides of the market. Additionally, we observe that as the number of platforms increases in the competition model, market participation rises. Profits, however, decrease when the net normalized deterministic utility is sufficiently low but increase when it is high. Furthermore, we identify specific conditions that quantify the change of price and consumer surplus when the competition increases.