Optimal pricing and commitment in two-sided markets ∗

This paper proposes a model of Bertrand competition between platforms and analyzes the sustainability of dominant platform equilibria in two-sided markets with the following characteristics: i) platforms are essential bottlenecks for buyers (users) to access the products offered by sellers (developers); ii) sellers enter the market before buyers; iii) only sellers can multihome; iv) platforms can charge fixed fees on both sides and variable fees (royalties) to sellers. The central issue arising in such a context is the ability of platforms to credibly commit to the price they will charge buyers when they set their prices for sellers. The possibility of commitment changes the pricing game substantially by enlarging the set of pricing strategies available to platforms and we investigate its effect on the sustainability of dominant platform equilibria and resulting profits, both when sellers are bound to exclusivity and when they are allowed to multihome.