Second-Degree Price Discrimination by a Two-Sided Monopoly Platform

Abstract

In this article we study second-degree price discrimination by a two-sided monopoly platform. We find novel distortions that arise due to the two-sidedness of the market. They make the standard result "no distortion at top and downward distortion at bottom" not holding. They generate a new type of non-responsiveness, different from the one found by Guesnerie and Laffont (1984). We also show that the platform may mitigate or remove non-responsiveness at one side by properly designing price discrimination on the other side. These findings help to address our central question, i.e., when price discrimination on one side substitutes for or complements price discrimination on the other side. As an application, we study the optimal mechanism design for an advertising platform mediating advertisers and consumers.

Keywords: (second-degree) price discrimination, advertising, non-responsiveness, Two-sided markets, type reversal

JEL Classification: D4, D82, L5, M3