ANTITRUST ECONOMICS 2013
David S. Evans
University of Chicago, Global Economics Group
Elisa Mariscal
CIDE, Global Economics Group
TOPIC 11: MARKET DEFINITION FOR MULTISIDED
PLATFORMS
Topic 11| Part 2
3 October 2013
Overview
2
Part 1
Part 2
Overview of
Market Definition
Competitive
Constraints and
Two-Sided Market
Definition
General Principles
of Market
Definition
Using Single-Sided
Market Definition in
a Two-Sided World
Hypothetical
Monopolist Test
Market Definition
with Additive Prices
Critical Loss
Analysis
Pragmatic
Approaches to the
Analysis of Two-Sided
Market
A Shopping Mall Merger Example
3
Four malls in very small
country owned by different
operators
Five High Streets with shops
3
1
2
Mall 1 and Mall 3 propose to
merge into Mall 1+3
4
What are the relevant market(s)? Can we use traditional SSNIP-based tools
to answer that? How do we assess market power? Would the merger result
in a “substantial lessening of competition” in those markets?
Shopping Mall Platforms
4
Two sides are shoppers and retail stores
Shoppers pay price of zero usually
Retail stores pay rent plus sometimes a percent of sales
Shopping malls have one or more “anchor stores” which usually pay
very low rents
Incremental profit on the money-making side of the platform comes
mainly from non-anchor stores
Shopping Malls and Anchor Stores
5
Anchor Store
6
Competitive Constraints and
Two-Sided Market Definition
Refresher on Economics of Two-Sided Platforms
7
Each side is a complement to the other side
• Shoppers like retail stores and vice versa
Prices and profits for the two sides are interlinked
• Fewer amenities for shoppers reduces prices and profits from retailers.
Higher prices to retailers reduces variety and raises cost to shoppers
which has feedback on prices retailers are willing to pay.
Profit maximization decisions are based on a “system of interlinked
sides” rather than individual sides
• Shopping mall gets one profit from shoppers+retailers which is earned
from the joint costs of building and operating the mall.
The “Other” Side Acts as a Price Constraint
8
If a platform increases the price on side A that will not only reduce
demand on side A but also—through the indirect network effects—
demand on side B.
The loss of demand on side B degrades the value of the platform to
side A, leading to a further reduction in demand by side A
customers.
The complementary side B therefore magnifies the effect of a price
increase on side A.
Demand on side A is more elastic after taking the cross effect into
account.
Space in a Shopping Mall
For a price change around this
point the flatter curve reflects
the feedback effects on the
shopper side resulting from fewer
or less interesting stores
$8
Price per meter
9
Accounting for Two-Sided Effects Makes
Demand More Elastic
$7
$6
$5
$4
$3
$2
$1
1
2
3
4
5
6
7
8
9
10
Thousands of meters rented
11
The
magnifying for
effect
of the complementary
side on
Accounting
Two-Sided
Effects Makes
demand
response
price increase
Demand
More to
Elastic
10
PA ↑5% ⇒ QA ↓20% ⇒ QB ↓5% (demand elasticity=20%/5%=4)
QB ↓5% ⇒ QA ↓3% ⇒ QB ↓2%
…….. (so the feedback loop continues)
Ending up at: QA ↓30%,
QB ↓10% (demand elasticity= (30%/5%)=6
As a result of positive feedback effects a 5% increase in the price on side
A leads in this example to a 30% decrease in the quantity on side A and a
10% decrease in the quantity on side B. True demand elasticity with
feedback effects of 6 rather than 4.
The Cross-Effects for the Shopping Mall Merger
Reduce the Ability to Raise Prices
11
Suppose independent malls 1 and 3 merge to form merged mall
1+3.
After the merger the merged mall 1+3 will have an incentive to raise
prices to the extent that the two malls constrained each other premerger.
The ability of the merged mall 1+3 to raise price to either side
depends on the cross-effects. If it raises prices to retailers then the
quality of the mall will decline and fewer shoppers will come; if they
reduce amenities for shoppers retailers will want to pay less.
The complementary side therefore constrains the ability to profitably
raise price.
How much this matters in practice depends on how big the cross-effects
are. They may be small enough to ignore safely, or so big they must be
considered.
Other Platforms Serve as a Constraint
12
Critical question is the extent to which the other platforms provide
substitutes for the customers on side A or side B of a platform.
• Key issue besides price is whether other platforms provide an attractive number
and variety of complementary customers.
If Merged Mall 1+3 raises price to retailers do Malls 2 and 4 offer good
alternative for retailers?
• Foot traffic at malls (size of other side).
• Substitutability of shoppers in Malls 2/4. What if 1/3 are downscale and 2/4 are
upscale?
Multihoming May Make Alternative Platforms Closer
Substitutes in the Short-Run
13
If customers on a side use multiple platforms (multihome) then they
may be able to switch easily between them thereby constraining
price increases.
Shoppers
• Which malls do consumers
regularly patronize?
• To what extent are these
merging malls differentiated
and therefore not close
substitutes?
• How easily can consumers
switch between them which
depends mainly on distance
from work/home in the case
of malls?
Retailers
• Do retail stores operate at
several nearby malls
(probably not, except for
some large chains)?
• Could they switch sales
emphasis between stores?
The Role of Single-Sided Competitors
14
In some situations platforms may provide services on one side in
competition with single-sided firms.
• Advertising-supported media vs. pure subscription media
• General purpose payment cards vs. store cards
• Shopping malls vs. Main Streets vs. Stand-alone stores
Single-sided supplier to side A constrains the ability to raise price
to platform side A.
Single-sided supplier to side B constrains ability to raise price to
platform side A since if platform is less appealing, side B
customers will switch to single-sided supplier.
Single-Sided Competitors for Shopping Malls
15
If Merged Mall 1+3 tried to increase prices to
retailers or decreased amenities for shoppers:
Retailers might consider setting up shop on a
High St. or some other location.
Shoppers might consider going to a High St. or
drive to separate locations for shopping.
16
Using a Single-Sided Market
Definition in a Two-Sided World
Avoid Excluding One Side of the Platform From
Analysis
17
Consider a unilateral practice that concerns one side of a twosided platform business.
Traditional market definition would start with the product/service for
that side and define a market that only concerned that side.
It would therefore exclude the other side of the platform from the
analysis.
As a result the analysis would be forced to ignore the interlinked
customer sides and other relationships.
Next section deals with pragmatic approaches about dealing with this
problem. This section shows that even on a single side the traditional
analysis leads to improperly defined markets.
Single-Sided Market Definition Tools Don’t Apply
18
The analytical machinery for the traditional SSNIP test is based on
the simple price-cost markup rule that percent markup is equal to
the inverse of the elasticity of demand for the product.
The formulas for actual and critical loss are based on the simple
markup rule.
The formula for diversion ratios is based on the simple markup rule.
Since the simple markup rule does not apply for two-sided platforms
other formulae that are based on that rule do not apply for twosided platforms.
Single-Sided Critical Loss Wrong
19
CL 
M 
X
X M
P  MC
P
Single-sided formulas are
wrong because they are
based on the simple pricecost markup result which is
wrong because it ignores
linked demand between
the two sides.
Applying Single-Sided Tests to Two-Sided Platforms
Leads to Multiple Errors
20
“Hypothetical monopolist” may not be able to raise price by 10% or more (as
required by SSNIP) once the constraining effect of the “other side” is
considered.
The margin used in critical loss and diversion analysis overstates the price
elasticity of demand because it includes the positive-feedback constraint (so
it is elasticity plus feedback). (“Lerner-bias”)
Econometric demand estimates on price elasticity of demand will be
understated if the analyst doesn’t model the feedback between the two
sides. (“Econometric-bias”)
From the standpoint of single-sided market definition the “Lerner-bias” results
in defining too broad markets while the “Econometric-bias” results in
defining too narrow markets—in the case of symmetric two-sided merging
firms. Harder to predict in general.
Magnitude and relevance of these errors depend on the degree of the
cross-effects and thus how “two-sided” the relevant businesses really are.
Consumer Welfare and Market Definition
21
All competition issues involving two-sided platforms ultimately
concern two groups of distinct consumers.
Any business practice such as merger or exclusion that affects one
side of a two-sided platform affects the other side.
Economists would consider the effect of the practice on consumer
surplus for both groups (men/women, readers/advertisers, software
developers/software users, merchants/cardholders, etc.)
The market definition and market power analysis must enable this
welfare calculation.
22
Market Definition with Additive
Prices
Market Definition with Two-Sided Platforms
23
Does the competition policy issue concern a two-sided platform
and are the cross-effects significant enough to matter in practice?
If the issue pertains to one or more two-sided platforms identify
potential alternative platforms as well as single sided-competitors in
some cases.
Market is the group of substitutable platforms and single-sided
competitors. Could take a judgmental approach to define this or
apply the hypothetical monopolist test.
Hypothetical Monopolist Test in Two-Sided Markets
24
What is the minimum set of two-sided platforms and single-sided
competitors that if monopolized would be able to increase prices
significantly?
Easy case is when prices are additive because of joint production
and fixed proportions. In some cases weighted average price for
two sides might be effective proxy for overall prices. In other cases
will need to focus on prices separately.
This set of entities provides the relevant set of constraints for the
exercise of market power through merger or unilateral practices of
the firms at issue.
Hypothetical Monopolist Test with Additive
Prices
25
Could hypothetical monopolist increase total price by 10%?
Suppose the hypothetical price increase is 10% for each side.
Before Price Increase
Price
Marginal Cost
Margin
Output
Revenue
Cost
Operating Margin
Markup
Fixed Cost
Total Profit
Side A
$8
$4
$4
500
$4,000
$2,000
Side B
$2
$4
($2)
500
$1,000
$2,000
50%
-100%
Total
$10
$8
$2
500
$5,000
$4,000
$1,000
20%
$1,000
$0
After Price Increase
Side A
Price
$8.80
Marginal Cost
$4.00
Margin
$ 4.80
Output
?
Revenue
?
Cost
?
Operating Margin
Markup
Fixed Cost
Total Profit
Side B
$2.20
$4.00
($2.80)
?
?
?
Total
$11.00
$8.00
$3.00
?
?
?
?
$1,000
?
One practical difficulty is that we should be looking at the profit-maximizing change in
price structure which may not, and probably isn’t, a symmetric price increase to both
sides.
SSNIP Approach with Total Price and Additive Prices
26
SSNIP Test with Additive Prices.
• Total Price = T = PA + PB
• SSNIP = ∆T x 100
•
T
• SSNIP > 10% given optional change in individual prices
Modified Lerner Index for simple Rochet-Tirole Model with each side jointly
consuming a “transaction”
27
Pragmatic Approaches to the Analysis of
Two-Sided Market Definition and Power
Key Lesson: Avoid Approaches that Result in the
Exclusion of a Customer Side from the Analysis
28
Mechanical approaches such as traditional SSNIP may exclude
important economic relationships coming from the other side of a
two-side platform.
Could obscure linkages that provide additional avenues for
consumer harm or additional sources of efficiencies.
Could ignore linkages that provide significant constraints on market
power.
Taking a More Open Approach to the Analysis of
Market Definition and Power for Two-Sided Platforms
29
Assess the linkages between customer sides and whether the
magnitude of the cross-effects merit consideration.
Establish the contours of the ”business ecosystem” in which the
two-sided platform lives including competition with single-sided and
multi-sided platforms.
Use platform concepts to assess effects including in market power
for the platform overall and effects on the welfare of platform
customers combined.
Focus on competitive effects rather than a precise market definition.
End of Part 2, Next Class Horizontal Mergers
30
Part 1
Part 2
Legal and
Economic
Background of
Mergers
Unilateral Effects:
Economic
Evidence
Unilateral Effects:
Economic Theory
Coordinated
Effects: Economic
Theory and
Evidence