Is online media a two-sided market?

Abstract

The study of products or business that concurrently serve two or more “sides” of consumers has been one of the most active areas of microeconomic analysis in the past decade. However, the phrase “two-sided markets” has been used to describe markets with a variety of economic properties. Different articles and economists use the phrase inconsistently. This is probably one of the reasons why the EU antitrust authorities have accepted some industries as two-sided markets while not others. In order to solve the problem, this paper proposes a definition that the term “two-sided markets” should be applied to a product or business if, and only if, it is impossible for the business or product to exist if it is not operated in a two-sided manner. Importantly, this does not include online media.

Introduction

Two-sided markets denote an economic theory building upon theories of networks and multiple products, and study the behaviour of a producer faced by two groups of customers with distinct needs.¹ It is inspired by business models where a producer offers welfare-maximising discriminatory pricing to their customers, and charges essentially only one group of customers while serving the other group below marginal costs or sometimes even negative.² Many industries have been recognised as markets with a two-sided nature, such as payment cards, dating clubs, and agencies and, most relevant to the discussion of this paper, advertising-supported online media. Although this study was initiated only about a decade ago, it has become one of the most influential microeconomic analyses.³

Despite their significant contribution to explaining pricing strategies of those business or products, two-sided markets are not confronted without problems. The most prominent one is that no consensus has been formed on its definition. The existing definitions of two-sided markets suffer first from excessive specificity, over-inclusiveness, or too much vagueness to be of use.⁴ Many authors often start their analyses by giving an extensional definition, and then take it for granted that their definition is clear enough so that when coming to the intentional definition their analyses are often hollow. It is not rare to see definitions such as “you know it when you see it”. Under this approach, two-sided markets are subject both to Type I (over enforcement) and Type II (under enforcement) errors. But here the Type I error is more the concern of this paper as many authors tend to make the definition over-inclusive, including markets with multiple products. Moreover, relevant economic literatures, where a limited number of intentional definitions are offered, also suffer from inconsistency. In particular, some doubt is cast over whether advertising-supported media should be considered as an example of two-sided markets. Different answers lead to various definitions.

In addition to the economic discussion, the two-sided market has, since its inception, also attracted the attention of the European Commission (Commission) and the EU courts, i.e. the General Court (GC) and the European Court of Justice (ECJ), when applying EU competition law. Until now these EU authorities have had chances to review industrial sectors related to two-sided markets such as payment cards, advertising intermediaries and advertising-supported media (including newspapers, magazines and online media). However, while the EU authorities have more or less accepted the theory for payment cards and advertising intermediaries, they (probably intentionally) never referred to it in cases involving advertising-supported media, which is nevertheless considered as a canonical example of two-sided markets by most economists.⁵

Hence it is submitted that advertising-supported media remains the key to exploring the properties of two-sided markets. In order to give an appropriate intensional definition, the subsequent discussion is structured as follows. Part 2 carries out a brief literature review, and differences between influential definitions are shown. Part 3 examines EU competition cases involving industrial sectors related to two-sided markets. After revealing the importance of advertising-supported media to the definition of two-sided markets, Part 4 delves itself into the analysis whether advertising-supported media has two-sidedness from an economic perspective. Based on the conclusion that it is only a one-sided market, the Part 5 proposes its own definition of two-sided markets. The paper ends with some concluding remarks.