Costly quality, moral hazard and two -sided markets

The object of this dissertation is to further the study of two-sided markets by departing from the standard setting of price competition alone. Specifically the first two chapters introduce costly differentiation and in doing so contribute to the two-sided market literature by establishing a generic downward distortion in quality. This result is robust to different specifications in the monopoly case (Chapter 1) and arises again in a duopoly (Chapter 2). In the latter, whether a Nash equilibrium exists on one side depends on the size of the profits to be extracted on the other. When competing platforms play in mixed strategies one of them may be inactive ex post. This work also extends a well-established model (Shaked and Sutton (1982)) in the Industrial Organization literature, which speaks to the role of quality as a source of endogenous differentiation. The last chapter allows for moral hazard on a trading platform. It contributes to the two-sided market literature by showing that opportunistic behavior on the part of sellers leads to lower transaction fees on both sides to (1) compensate buyers and (2) provide sellers with incentives to cooperate. Furthermore it breaks an equivalence result between transaction fees and lump-sum payment established by Rochet and Tirole (2005). Here these two forms of payment plays a different role: lump-sum fees are used to extract the sellers' surplus, while the linear prices are distorted downward to generate the incentives to cooperate. In this case moral hazard can be completely overcome. Unlike in the standard, one-sided moral hazard problem it is not obvious that this result should obtain. In this two-sided market problem, the incentives on the sellers' side depend on the buyers' participation, while the buyers' participation depends on the sellers' incentives. The platform solves these problems simultaneously.