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In many two-sided markets we observe that there is a common distributor on one side of the market. One example is the TV industry, where TV channels choose advertising prices to maximize own profit and typically delegate determination of viewer prices to independent distributors. We show that in such a market structure the stronger the competition between the TV channels, the greater will joint profits in the TV industry be. We also show that joint profits may be higher if the wholesale contract between each TV channel and the distributor consists of a simple fixed fee rather than a two-part tariff.
8. Concluding remarks
Our analysis illustrates the challenge firms face when trying to coordinate prices in a two-sided market. It might seem appropriate to let an independent distributor set viewer prices in order to reduce competition between TV channels in the viewer market. This could lead to a cartel-like outcome in a one-sided market, but not exactly so in a twosided market. The problem is that inter-firm price coordination on just one side of the market prevents intra-firm price coordination across the markets. In this paper we show that this might lead to inefficiently high generalized prices for both the end-users and the industry, and more so if the wholesale contract between a distributor and a TV channel consists of a two-part tariff rather than a simple fixed fee. For the TV channels, the managerial implications are clear. Given the coordination problems described above, they should bypass the distributor unless the end-users perceive their products as sufficiently close substitutes. Alternatively, they could use an independent distributor to coordinate viewer prices, combined with other ways of taking the twosidedness of the market into account. For example, the distributors' payment to the TV channels could depend on the TV channels' advertising revenues. In the US we have recently observed contracts that include such elements. In particular, there are examples of contracts between distributors and TV channels where they agree on the amount of advertising. 18 However, this is not a common business model, and we have not seen it used in Europe.19 Although such complex contracts are feasible in theory, they are for various reasons not implemented.20 For the regulator, the picture is very different. The end-users are always better off if end-user prices are not coordinated. According to our model, antitrust authorities should therefore be skeptical to price coordination in two-sided markets. In this respect the onesided logic – where horizontal price fixing is treated as a serious problem – is still valid.