Price Discrimination and Competition in Many-to-Many Matching Markets

Northwestern University, Evanston IL

Investigators

Abstract

This project develops a new theoretical framework for studying many-to-many matching markets, that is, markets where the product sold by a platform firm is access to other agents. The research team first investigates how platforms can engage in second-degree price discrimination to sort agents into multiple (possibly non-exclusive) networks. Despite the fact that these practices are common in many-to-many matching markets such as the provision of health care, cable TV, internet services, and online advertising, the theoretical analysis of such practices is limited. They use a mechanism design approach. This allows them to shed light on the platforms' profit-maximizing practices and on the allocations that they induce, without imposing ad-hoc restrictions on the network architecture (e.g., single-homing) and on the pricing strategies (e.g., two-part tariffs). The starting point of the analysis is the recognition of the fact that agents in such markets typically have private information both about their willingness to pay to reach other agents as well as about idiosyncratic characteristics that determine their attractiveness for those agents they are matched to. For example, in the contest of health care, patients have private information both about their willingness to pay to join different physician networks, as well as about various idiosyncratic characteristics (health status, life style, risks) that determine the profits that the physicians expect from having such patients in the network. The analysis sheds light on (i) the distortions associated with the private and public provision of matching services, (ii) how such distortions depend on the degree of platform competition, (iii) how the government can increase welfare by correcting such inefficiencies using instruments such as subsidies and taxes (and, in some cases, imposing universal service obligations), but also (iv) what network structures are more likely to emerge under private and public provision (e.g., single-homing vs multi-homing), (v) the effects on profits, network structure, and welfare of various shocks that alter the distribution of valuations and/or the attractiveness of the two sides. The team also studies how the dispersion of information affects the equilibrium prices and the network allocations in two-sided markets where multiple platforms compete to attract users on each side. The researchers develop a model where agents are allowed to have horizontally differentiated preferences for the services of the competing platforms as well as private information both about their utility from joining the platforms and about the distribution of preferences and information in the cross-section of the population. This richness is meant to shed light on how the familiar effects that emerge in two-sided markets due to network externalities interact with the novel (and unexplored) effects coming from the dispersion of information. The analysis uses techniques from the literature on "global games" to obtain the convenience of equilibrium uniqueness while at the same time permitting the outcome of such equilibrium to depend on the endogenous pricing strategies of the competing platforms. Understanding the role that the dispersion of information plays in such markets is instrumental, for example, to understanding the effects of platforms' advertising campaigns on network structure, profits, consumer surplus, and welfare. The proposed activity is expected to be relevant both for the various branches of economic theory interested in matching problems (two-sided markets, health care economics, school assignment problem, network economics), but also for practitioners in such markets who can use the theoretical analysis for experimental and empirical work. The results will be useful for competition policy, policy to promote the adoption of new technologies, and health care policy.