Seven of the ten most valuable businesses in the world are digital platforms. Their names are familiar to everyone: Apple, Microsoft, Amazon, Alphabet (Google), Alibaba, Facebook, and Tencent. The user base for Facebook alone includes 2.7 billion people, more than the populations of India and China combined. Google processes more than 60% of online searches in the United States, and almost 90% of those in Europe. Such companies not only wield enormous economic power, they have increasing power over our social, political, and personal lives, too. It is unsurprising then, that lawmakers of all kinds are interested in how to regulate such platforms in a way that would inhibit this power from being excercised contrary to the public good.
The economics of these digital platforms, however, is complicated. First, most of these platforms facilitate two-sided markets, serving two distinct customer bases. Apple’s app store serves both consumers interested in finding interesting and useful apps, and app developers interested in finding customers to sell their creations to. In such a situation, what counts as an optimal pricing strategy- and thus what counts as worrisome deviations from it—is complicated. It may be rational and beneficial, for instance, for Apple to undercharge phone users and make up the loss by overcharging app developers. Second, digital platforms are often dominated by network effects. This term refers to those goods or services that become more valuable as more and more people use them. Vendors want to sell their wares on Amazon because that’s where the customers are, and customers shop on Amazon because so many vendors sell on the site.
Funds from this grant support a project by Fiona Scott Morton at the Tobin Center at Yale to convene a multidisciplinary working group of leading scholars to produce a compelling research agenda that lays out the fundamental theoretical and empirical research needed to advance our understanding of the economics of regulating two-sided platforms.