A Study On Platform's Tying Strategy In Two-sided Markets

Many industries such as banking cards,electronic transaction intermediaries, web search engines,recruitment websites,the Medias,shopping malls and house agencies are two-sided markets.Companies connecting different groups in two-sided markets are called platforms.Typically,two-sided markets have a "subsidy side",that is,a group of users who,when attracted in volume,are highly valued by the "money side",the other user group.Because the number of subsidy-side users is crucial to developing strong network effects,the platform sets prices for that side below the level it would charge if it viewed the subsidy side as an independent market.The goal is to generate "cross-side" network effects.The challenge for the platform is how to attract subsidy side users.Tying could be used as a subsidy tool to attract users to join platforms in order to improve the platforms' network effects.As a result,platforms could set prices higher in "money side" which improves the platforms' profit.The thesis mainly discusses the strategic use of tying to improve platform's profitability.Firstly,the thesis analyses the effectiveness of tying as a subsidy tool, which means platforms could improve profit by tying.Secondly,the thesis constructed a two-stage game of duopoly competition.In the case of both sides single-homing,tying not only reduces competitor's profit,but also does harm to platform itself.The larger the extent of asymmetry in externalities between the two sides,the worse the competitor will be harmed.Tying will do less harm to competitor when platform differentiation is obvious.In the case of competitive bottleneck,which one side single-homing and the other side multi-homing,whether tying could or couldn't improve platform's profit depends on cross-network externality,platform differentiation and reservation price of the tied product.When the cross-network externality is large enough,platform always benefit from tying.It shows that tying always reduces competitor's profit in two-sided markets of competitive bottleneck.