Private Contracts in Two-Sided Markets

Two-sided platforms that connect consumers and sellers often sign private contracts with sellers. We show that private contracting leads to lower platform profits, consumer surplus, and social welfare than public... [ view full abstract ]

Two-sided platforms that connect consumers and sellers often sign private contracts with sellers. We show that private contracting leads to lower platform profits, consumer surplus, and social welfare than public contracting. Our results help explain price structures commonly observed in two-sided markets (e.g., videogames and ebooks). We study the welfare effects of most favored nation clauses, price-forcing contracts, and platform integration with sellers, and relate our results to the agency model of sales. We find that enhancing the market power of a dominant platform over sellers increases welfare. Consequently, policy prescriptions derived from one-sided settings are completely reversed under two-sidedness.