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 Seminar postponed to a later date.

More info coming soon ...

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Paul Belleflamme (CORE)

will give a presentation on

Strategically free

Abstract

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On many two-sided platforms, one group of users can access the platform services for free. The usual economic explanation behind this observation is that price choices are constrained. Either the best conduct is to subsidize a group of users but negative prices are prohibited or unfeasible. Or, the profit-maximizing price is slightly above zero but micropayments are too costly to implement. We propose an alternative strategic explanation. We consider two two-sided platforms that compete to attract single-homing users of two distinct groups. Extending the model of Armstrong (2006), we allow platforms to commit, in the first stage, to set their membership fee equal to zero for one group of users. In the second stage, platforms choose whichever membership fee that was not committed to beforehand. We show that both platforms may give free access to the same group of users at the subgame-perfect equilibrium of this game, although they would have charged positive fees absent the possibility of commitment. The intuition is as follows. Positive cross-group network effects lead platforms to use each group of users as “bait” to attract the other group. If the price for one group (say A) is zero, there is no revenue to be made from that group. So, by committing to give free access to Group A users, the platform credibly indicates that it will not compete too aggressively to attract users from Group B, which leads the rival platform to act likewise. Such a commitment is optimal if the additional profit resulting from the relaxed competition for Group B users makes up for the lost profit from Group A users.