| Abstract: |
This paper develops a simple model of monopoly platform pricing accounting for
two pertinent features of matching markets. 1) The trading process is
characterized by search and matching frictions implying limits to positive
cross-side network effects and the presence of own-side congestion. 2)Matched
agents bargain over the division of the match surplus depending on the
qualitative characteristics of both parties. We find that, compared to the
frictionless benchmark typically analyzed in the classic platform pricing
literature, the harms of monopoly market power are mitigated by frictions.
However, when the platform is allowed to make investments in the reduction of
frictions, a private platform is likely to under-invest compared to a
Pigouvian platform. In addition, accounting for user quality differentiation
further reduces classic harms of monopoly market power when user quality types
are complements in creation of the match surplus. In this case it is socially
desirable to attract smaller groups of users with higher average quality to
maximize the aggregate match surplus, resulting in a downward price
distortion. This result is reversed when quality types are substitutes and the
distortion disappears when they are strategically independent. |