Pricing of Platforms in Two-Sided Markets with Heterogeneous Agents and Limited Market Size

Abstract

This paper studies equilibrium in a two-sided market represented by network platforms and heterogeneous agents. The setup below is based on the Armstrong monopoly model suggested in 2006 under the following assumptions: (1) a continuum of agents of limited size on each side of the market and (2) the heterogeneous utility of agents with the Hotelling specification. We show that the monopoly’s optimal pricing strategy always results in a corner solution in terms of the equilibrium market share. In addition, we solve the social planner’s optimization problem, obtaining a similar corner solution. Finally, we find the exact values for the equilibrium in the case of duopoly in a two-sided market with two platforms.