Price Discrimination in Two-Sided Markets

We examine the profitability and welfare implications of targeted price discrimination (PD) in two-sided markets. First, we show that equilibrium discriminatory prices exhibit novel features relative to discriminatory prices in one-sided models and uniform prices in two-sided models. Second, we compare the profitability of perfect PD, relative to uniform prices in a two-sided market. The conventional wisdom from one-sided horizontally differentiated markets is that PD hurts the firms and benefits consumers, prisoners’ dilemma. We show that PD, in a two-sided market, may actually soften the competition. Our results suggest that the conventional advice that PD is good for competition based on one-sided markets may not carry over to two-sided markets.