The Impact of Strategic Agents in Two-Sided Markets

This paper introduces two modifications to standard two-sided market models. In the first modification, one side of the agents (advertisers) make strategic choices (on quality of their ads) which affect the utility of agents joining the same platform on the other side. We show that this feature of strategic agents leads to qualitatively different econometric specifications for the estimation of group externality parameters. Relative to benchmark case, prices on both sides are lower under strategic agents, benefiting the agents at the cost of platforms. In the other modification, we introduce independent retailers between platforms and agents on the other side (readers). Our results suggest that this modification has no impact on estimating the group externality parameters. However, equilibrium prices on either side depend on group externality parameters at both sides. This is in sharp contrast to standard results where prices on one side depend only on group externality parameter of the other side. In the special case where each platform is split into two independent divisions, we find that equilibrium price is the same across all four divisions. Moreover, this common price depends on the product of the group externality parameters of the two sides.