Two-Sided Markets and the Challenge of Turning Economic Theory into Antitrust Policy

• DOI: 10.1177/0003603X15607155
• Published date: 01 December 2015
• Date: 01 December 2015
• Subject Matter: Economics Article

Economics Article
The Antitrust Bulletin
2015, Vol. 60(4) 426-461
Two-Sided Markets and the
ª The Author(s) 2015
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DOI: 10.1177/0003603X15607155
Theory into Antitrust Policy
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Dirk Auer* and Nicolas Petit*
Abstract
The award of the Nobel Prize in Economics to Professor Jean Tirole in 2014 has generated intense
interest about his brainchild theory of two-sided markets. Against this background, this article
explores whether there is such a thing as a unified theory of two-sided markets and whether the two-
sided markets literature can readily be applied by antitrust agencies, regulatory authorities, and courts.
This article vindicates caution. The buzz surrounding two-sided markets could mask the fact that, in
many cases, the policy implications of the theory are not yet clear, and divergences among its pro-
ponents are often underplayed. In that regard, the article notably stresses that one of the key con-
ditions of market two-sidedness identified by Rochet and Tirole in their seminal paper of 2003—the
unavailability of Coasian bargaining between both sides of a platform—has often disappeared from
subsequent scholarship. This omission threatens the coherent implementation of the theory of two-
sided markets. Without this qualification, markets are often mischaracterized as two-sided, as soon as
they display prima facie signs of indirect network externalities.
Keywords
antitrust, competition law, two-sided markets, Coase theorem, payment platforms, Microsoft, e-books
I. Introduction
This article discusses the two-sided markets theory in an antitrust context. At its core, the theory
finds that in markets where platforms interact with distinct groups of users, total output is influ-
enced by the allocation of prices between the various groups. This finding marks a departure from
the Structure-Conduct-Performance (SCP) paradigm which has informed decades of applied anti-
trust policy across the world.1
1. The SCP paradigm remains a prominent foundation for the formulation of antitrust policy. This, however, is not to deny
advances and refinements brought to the SCP paradigm, in particular with the introduction of game theory in antitrust
literature.
*Liege Competition and Innovation Institute (‘‘LCII’’), University of Lie`ge (ULg), Liege, Belgium
Corresponding Author:
Nicolas Petit, University of Liege (ULg), Liege Competition and Innovation Institute (‘ LCII’’), Liege, Belgium.
Email: nicolas.petit@ulg.ac.be

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Auer and Petit
427
Today, the theory of two-sided markets is one of the most widely discussed topics in modern indus-
trial organization (IO) scholarship. Hundreds of academic papers have been written about it in the last
ten years.2 And several of those papers have entered the antitrust literature, insisting on the potential of
the two-sided markets theory to inform antitrust policy and regulation.3 While scholars are still divided
as to the relevance of the theory across all areas of antitrust policy, most tend to agree on its inherent
contribution to the enforcement of antitrust law, in particular in the digital economy.4
Conceivably, this novel field of academic work will sooner or later filter through practice. The
economics-driven nature of the antitrust process is favorable to the importation of IO developments
in real life cases. As Kimble v. Marvel Entertainement LLC recalled, the U.S. Supreme Court ‘‘has felt
free to revise [its] legal analysis as economic understanding evolves and to reverse antitrust precedents
that misperceived a practice’s competitive consequences.’’5 At some point, stakeholders—economic
consultants, lawyers, lobbyists, and governments—will invite antitrust agencies, courts, and regulators
to pass judgment on two-sided market arguments. In a more distant future, agencies and regulators may
even attempt to derive general policy guidelines from two-sided markets literature.6 While some scho-
lars like Josh Wright and Janusz Ordover have cautioned against a premature policy implementation of
two-sided markets theory,7 their voices remain marginal in the literature.
Our article seeks to take a stance in this debate. Its goal is to identify what the theory of two-sided
markets has to offer to competition agencies and the challenges they may face when trying to apply the
theory’s core findings.
To explore those issues, the article is structured as follows. Section II tries to ascertain the place
occupied by two-sided markets theory in the industrial organization literature. We find that there is,
to date, no unified theory of two-sided markets. On the contrary, we document serious conceptual
divergences amongst its proponents. Section III investigates the place of the two-sided markets theory
in modern antitrust policy in the U.S. and the EU. We review two types of unilateral and coordinated
conduct cases. We first look at cases where the decision-maker explicitly took account of the theory of
two-sided markets to resolve the case. We then discuss cases where the theory did not ostensibly influ-
ence the decision-maker, despite its possible relevance to the main proceedings. This investigation in
2. See David S. Evans & Richard Schmalensee, The Antitrust Analysis of Multi-Sided Platform Businesses (Nat’l Bureau of
Econ. Research, Working Paper No w18783, 2012). Evans and Schmalensee have counted more than 200 papers on
multisided platforms.
3. See, for instance, Bernard Caillaud & Bruno Jullien, Chicken & Egg: Competition Among Intermediation Service Providers,
34 RAND J. ECON. 309, 309–28 (2003). The authors consider that ‘‘the design of competition policy rules with respect to such
markets should take these characteristics into account.’’
4. Some scholars find the theory to be relevant across the board, including in relation to exclusionary conduct. See Schmalensee
and Evans, supra note 2. Others argue that two-sided markets theory will mainly grow in importance in relation to pricing
issues such as aggressive price competition in single firm conduct cases, market definition and the SSNIP test in merger
control, etc. See Marc Rysman, The Economics of Two-Sided Markets, 23 J. ECON. PERSPECTIVES 125, 125–43 (2009).
Although there are some exceptions, only a few papers identify theories of harm specific to two-sided markets. See
Massimo Motta & Helder Vasconcelos, Exclusionary Pricing in a Two-Sided Market (Centre for Econ. Pol’y Research,
Discussion Paper No. 9164, 2012).
5. Kimble v. Marvel Entertainment, LLC, 576 U.S. ____ (2015).
6. See notably a report by the German monopoly commission. Monopolkommissie, Competition Policy: The Challenge of
Digital Markets (Special Report by the Monopolies Commission pursuant to Section 44(1)(4) ARC, 1 June 2015), http://
www.monopolkommission.de/images/PDF/SG/SG68/S68_summary.pdf (the report sets out a number of challenges
relating to antitrust enforcement in two-sided markets, which could potentially lead to the establishment of more formal
guidelines).
7. See notably, the statement of Joshua Wright, Commissioner of the FTC. Ron Knox, Wright: Guidance on Two-Sided Markets
May Prove Difficult, GLOBAL COMPETITION REVIEW, Feb. 11, 2013, http://globalcompetitionreview.com/news/article/33038/
wright-guidance-two-sided-markets-may-prove-difficult/. See also Janusz Ordover, Comments on Evans & Schmalensee’s
‘‘The Industrial Organization of Markets with Two-Sided Platforms,’’ 3 COMPETITION POL’Y INT’L 181, 181–89 (2007)
(Ordover argues that there is still much work to be done on the topic of two-sided markets).

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The Antitrust Bulletin 60(4)
positive antitrust policy ultimately helps cast light on the added-value that the two-sided markets
theory brings to practice. Section IV concludes. It finds that two-sided markets theory has brought
a number of practical contributions in applied antitrust policy, even though a number of challenges
remain. Some of these challenges would be overcome if a more cohesive theory of two-sided markets
were developed.
II. The Theory of Two-Sided Markets and Its Place in the Industrial
Organization Literature
This section explains that the two-sided markets theory is a refinement of traditional IO theory. It then
shows that from an operational standpoint, the theory is still in a state of flux, for many of its defini-
tions and concepts remain unsettled. Last, it suggests that more work is needed, if the theory is ever to
usher in a unified and mature normative framework.
A. Epistemological Assessment
1. The classic descriptive ambition of two-sided markets theory. The essence of industrial organization is to
study the effects of distinct forms of industry structure on price and output levels. Monopoly theory
posits that a single supplier will charge a higher price than the market demands, causing a deadweight
loss as valuable output is not produced (allocative inefficiency). The theory of perfect competition
finds that atomistic suppliers will serve at the lowest possible price, producing all the requested output
(allocative efficiency). Oligopoly theory suggests that when there are only a few suppliers, other fac-
tors influence price levels, in several possible directions (between the monopoly and the perfect com-
petition level).
These questions were studied by early scholars like Marshall,8 Cournot,9 Bertrand,10 Chamberlin,11
Mason,12 and Robinson13 from the late nineteenth to the mid-twentieth centuries.14 They have also
been on the research agenda of Harvard,15 Chicago,16 and...