Mechanism Design in Two-Sided Markets: Auctioning Users

Many two-sided platforms (such as search engines and business directories) make pro…ts from auctioning their user base to advertisers. Yet, auctioning users is di¤erent from selling standard commodities, since the participation decision by users (and, therefore, the size of the platform’s user base) depends on the bene…t users expect to receive from joining the platform. In this setting, what is the pro…t-maximizing auction? And how should a platform structure its user fees? First, I show that if bidders pro…t from the match more than users, it is optimal for the platform to o¤er subsidies to users, and recoup losses on the user side of the market by inducing aggressive bidding on the bidder side (loss leader strategy). Second, I show that if the bidders’ willingness to pay for the match is positively a¢ liated with the value users derive from bidders, the revenue-maximizing mechanism favors bidders with low values to users (search diversion). In turn, when charging or subsidizing users is not feasible, the platform favors bidders with high (low) user values as a substitute for the subsidies (fees) it would otherwise implement. In this setting, I also show that competition between two-sided platforms can decrease total welfare when the supply of users is su¢ ciently inelastic. This result implies that applying standard antitrust economics to two-sided markets may be misleading. email [email protected]. I would like to thank my committe Alessandro Pavan (co-chair), Marco Ottaviani (co-chair), Rakesh Vohra and William Rogerson for their support and encouragement, as well as Carlos Madeira, Shiran Rachmilevitch, James Schummer, Ron Siegel, Michael Whinston and Asher Wolinsky for very helpful discussions. I am also very grateful for the …nacial support provided by the Center for the Study of Industrial Organization at Northwestern University.