Private Contracts in Two-Sided Markets

Gastón Llanes () and Francisco Ruiz-Aliseda

No 15-16, Working Papers from NET Institute

Abstract: We study a two-sided market in which a platform connects consumers and sellers, and signs private contracts with sellers. We compare this situation with a two-sided market with public contracts. We find that the platform provider sets positive (negative) royalties to sellers and earns a negative (positive) markup on consumers when contracts are private (public). Thus, private contracting has a significant effect on the price structure. Private contracting leads to lower platform profits, consumer surplus, and social welfare. We study the welfare effects of most-favored-nation clauses, price-forcing contracts, and integration with sellers; and relate our results with the agency model of sales. Our results indicate that enhancing the market power of a dominant platform over sellers may increase welfare because it acts as a commitment device for inducing lower seller prices, mitigating the hold-up problem borne by consumers when they cannot observe sellers' contracts.

Keywords: Two-Sided Markets; Platforms; Vertical Relations; Most-Favored Nation; Price-Forcing Contracts; Resale Price Maintenance; Integration; Agency Model of Sales (search for similar items in EconPapers)
JEL-codes: L12 L14 L42 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2015-09
New Economics Papers: this item is included in nep-com, nep-cta, nep-mic, nep-mkt and nep-net
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