Discussion Papers

No. 410: Market analysis dealing with multi-sided markets

Authors: Christian Hildebrandt, Lorenz Nett

(Full version only available in German)

Summary

In many cases digital markets are so-called multi-sided markets. Online platforms can be described as intermediaries for different kind of users. They enable various kind of users to interact in different ways socially with their peers, to transfer goods or services, etc. Well known Internet platforms are search engines (like Google Search), social networks (like Facebook), trading platforms (like Amazon-Marketplace), payment platforms (like PayPal), as well as media service providers (like YouTube) that enable the other side to launch advertisements.

Traditional methodologies to determine market dominance in single markets face their limits. The business pricing behaviour in multi-sided markets differs significantly from traditional markets since platform providers maximise their profits over all kind of users. Due to direct and indirect network effects and common fixed costs competitive and welfare optimal prices have substantially different characteristics compared to conventional markets. For example, quite often in advertisement platforms, subscribers to the platform do not have to pay anything for using the platform. Substantial network effects significantly determine the market structure. Competition for and not within the market is quite often observed resulting in a "winner-takes-it-all" structure. However, other parameters may influence market power as well such as economies of scale, user restrictions, the possibility to differentiate Online-Platform services, Multi-Homing and switching costs of users. Dynamic innovations and disruptive competition have an implication on market behaviour.

Personal data provision is another important element that effects market behaviour in Online-Platform markets. Subscribers of an Online-Platform have to agree that personal data can be used by the Platform providers. Personal data are a valuable resource that create market value (e.g. personalised advertisement) and influences market behaviour. In determining a relevant market and identifying market dominance data provision and data usage has also to be taken into account.

The main focus of the following paper is to identify the additional aspects that have to be evaluated in case of determining relevant markets and market dominance in multi-sided markets.

Discussion Paper is available for download.

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