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Three-Sided Markets

Three-Sided Markets. Consumers, Advertisers, and Content Providers on the Internet. Two-Sided Markets. Payments. Lower Price due to externality . Higher Price due to externality. Competitive wage. Payola. Pricing in Two-Sided Markets.

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Three-Sided Markets

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  1. Three-Sided Markets Consumers, Advertisers, and Content Providers on the Internet

  2. Two-Sided Markets Payments Lower Price due to externality Higher Price due to externality Competitive wage Payola

  3. Pricing in Two-Sided Markets Recall the Lerner Index for profit maximization: (P – MC)/P = -1/Ep The externalities in 2-sided markets add or subtract from the price-cost margin relative to one-sided markets For consumers: (P – MC)/P + Xc = -1/Ep For advertisers: (P – MC)/P + Xa = -1/Ep Xc is positive, while Xa is negative

  4. Three-Sided Markets Payments Price ≥ 0 Price > 0 -∞ < Price < +∞

  5. Pricing Three-Sided Markets • The externalities in 3-sided markets add or subtract from the price-cost margin relative to one-sided markets • For consumers: (P – MC)/P + Xc = -1/Ep • For advertisers: (P – MC)/P + Xa = -1/Ep • Two types of content providers • 1) those willing to buy access to consumers • Such as music labels and current or prospective artists • 2) those unwilling to buy access • Such as newspaper and magazine writers, TV news operations, etc. • For content providers willing to buy access: (P – MC)/P + Xp = -1/Ep • Xc is positive • More consumers raises the demand for advertising • Xa is negative • More ads may reduce consumer demand • Xp is positive • More/better content attracts consumers, raises ad demand

  6. Graphs • Two-sided markets • Lower price to consumers increases ad demand • Price ≥ 0 • Content providers generally unwilling to pay for access • Three-sided markets • Content providers generally willing to pay for access • Lower price to consumers increases ad demand • Price ≥ 0 • Lower price to content providers that increase ad demand • price can be positive or negative (a payment to providers)

  7. Cases and Examples • Intermediary (media/website) chooses content • Radio • Royalty rates for individual spins set by legislation • Payola is a payment for access to consumers from competing content providers (low Xp) • Intermediary and consumers choose content • Music Streaming • Two-tiered Pricing for Consumers • Listen free with ads • Pay a fee to listen without ads (opportunity cost of Xc) • Could be price discrimination if fee > opportunity cost of Xc • Upfront fee paid to owners of back catalogs in lieu of royalties (high Xp) • Royalties paid to other content providers (low Xp) • Consumers choose content • iTunes • Revenue sharing for content providers that have popular back catalogs (high Xp) • Fee to others to have recordings listed (low Xp) • YouTube • Video partners receive payments based on viewers and ad purchases (potential high Xp) • A form of revenue sharing • No fee to consumers (high Xc) • In which cases are content providers willing to pay for access to consumers? List the evidence for your position in each case.

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