Platform Competition and Market Design

Paper Session

Friday, Jan. 6, 2017 8:00 AM – 10:00 AM

Swissotel Chicago, Zurich B
Hosted By: American Economic Association
  • Chair: Marc Rysman, Boston University

Re-Matching, Experimentation, and Cross-Subsidization

Daniel Fershtman
,
Northwestern University
Alessandro Pavan
,
Northwestern University

Abstract

We study mediated many-to-many matching in dynamic two-sided markets in which agents' private valuations for potential partners evolve stochastically over time, either as the result of exogenous shocks, or as the result of experimentation. In many environments, the platform's profit-maximizing matching rule is either myopic or takes the form of a "virtual index rule" capturing the current and future profitability of each link between agents, accounting for the endogenous changes in the partners' matching values. We show how the optimal matching rules can be implemented via a sequence of scoring auctions. We contrast matching dynamics under profit maximization with their counterparts under welfare maximization. When all agents benefit from interacting with all other agents from the opposite side, profit maximization involves fewer and shorter interactions. This conclusion, however, needs not hold when certain agents dislike certain interactions.

Multidimensional Platform Design

André Veiga
,
University of Oxford
E. Glen Weyl
,
Microsoft Research and Yale University
Alexander White
,
Tsinghua University

Abstract

Successful platforms attract not just many users, but also those of the right kind. "The right kind of user" is one who can either be directly monetized or who differentially attracts other valuable users. Bonacich centrality on the network of user sorting with direct value of monetization captures this feedback loop and thus characterizes the value of user characteristics. We use this value to determine optimal steady-state platform design and reliable means for platforms to reach such a steady state. We apply these results respectively to explain the dynamic growth strategy of social networks and urban development policies of cities.

Will the Market Fix the Market? A Theory of Stock Exchange Competition and Innovation

Eric Budish
,
University of Chicago
Robin Lee
,
Harvard University
John Shim
,
University of Chicago

Abstract

We use theory and data to develop a new model of stock exchange competition. We then use the model to examine whether a recently proposed market design, frequent batch auctions, can successfully enter and compete against incumbent exchanges.

Discrete Pricing and Market Fragmentation: a Tale of Two-Sided Markets

Yong Chao
,
University of Louisville
Chen Yao
,
University of Warwick
Mao Ye
,
University of Illinois-Urbana-Champaign

Abstract

This paper is motivated by an institutional detail of stock market trading: tick size constraint, which requires quotes to be on a discrete pricing grid. Our findings suggest that this discrete pricing leads to two-sided pricing; whereas continuous pricing results in only one-sided pricing. Such discreteness gives rise to endogenous vertical differentiation among platforms, which can explain market fragmentation in the US stock exchange industry.
Discussant(s)
Dirk Bergemann
,
Yale University
Robin Lee
,
Harvard University
Lawrence Glosten
,
Columbia University
Joshua Mollner
,
Northwestern University
JEL Classifications
  • G2 - Financial Institutions and Services
  • L1 - Market Structure, Firm Strategy, and Market Performance