In media markets, such as the newspaper industry, the conventional tools of competition policy need to be adjusted to take account of the ''two-sided'' nature of the market. Writing in the November 2013 issue of the Economic Journal, Pauline Affeldt, Lapo Filistrucchi and Tobias Klein show that ignoring the two-sidedness of the newspaper market can lead to the incentives to raise prices to readers being underestimated and the incentives to raise advertising prices being completely missed.
Should a merger between two newspaper publishers be allowed? Would it lead to higher prices for readers? Would it raise prices for firms wishing to advertise in the newspapers? Such questions about what will happen to prices are typical ones for antitrust authorities to ask when analysing a merger. But as this research shows, in two-sided markets like newspapers, they need to look at potential pressures for prices to rise on both sides.
Unlike one-sided markets, firms in two-sided markets sell two different products or services to two distinct groups of customers. Newspapers, for example, cater both to readers and advertisers.
A two-sided market is characterised by ''indirect network externalities'' between the two groups of consumers. These arise when the utility obtained by a consumer of one group depends on the number of consumers of the other group and the two groups of customers do not ''internalise'' these externalities.
Applied to the example of newspapers, advertisers value advertising in a given newspaper more if it has more readers. Readers on the other hand might like, dislike or be indifferent towards advertising in a newspaper. Yet each side cares only about the price that it is charged, not about the price that the other side is charged.
The concept of ''upward pricing pressure'' was first proposed by Joseph Farrell and Carl Shapiro in 2010, when they were respectively head of economic analysis at the US Federal Communications Commission and at the Antitrust Division of the US Department of Justice.
Upward pricing pressure is an alternative to the traditional analysis of market concentration, according to which fewer firms lead to higher prices because of lower competition. Upward pricing pressure asks instead to what extent merging parties are likely to have incentives to raise prices post-merger.
These incentives arise because the merged entity, when setting prices, will take account of the fact that some of the lost sales of a product, following an increase in its price, will be recaptured by an increase in sales in the other, now merged, firm. After a merger, a price increase will thus cost less in terms of lost sales than before the merger. Clearly, the higher is the recaptured loss in sales, the higher is the incentive to raise the price
The new study shows that this value of diverted sales that are recaptured by the merged entity is different in a merger involving two-sided platforms compared with a merger in a one-sided market due to the indirect network externalities. This implies that the one-sided upward pricing pressure formulae need to be changed for the case of mergers in two-sided markets.
The researchers derive the relevant formulae and apply them to the example of a hypothetical merger between De Persgroep and the Telegraaf Group in the Dutch newspaper market.
They show that ignoring the two-sidedness of a market can lead to wrong conclusions about whether a merger leads to incentives to raise prices or not. In their example, one would underestimate the incentives to raise prices to readers and completely miss the incentives to raise advertising prices.
''Upward Pricing Pressure in Two-sided Markets'' by Pauline Affeldt, Lapo Filistrucchi and Tobias Klein is published in the November 2013 issue of the Economic Journal. Pauline Affeldt is at E.CA Economics. Lapo Filistrucchi is at the University of Florence. Tobias Klein is at Tilburg University.