Vertical Integration in Two-Sided Markets

This paper assesses whether vertical integration can help solving the chicken-and-egg coordination problem which arises in two-sided markets. The analysis builds on a two-sided market model with the following characteristics: i) a monopoly platform is an essential input that allows buyers to access the products offered by sellers; ii) there is a finite number of sellers which compete for buyers; iii) buyers are heterogenous: “core ” buyers have a demand for each product while “casual ” buyers purchase only the cheapest product; iv) the platform can be vertically integrated with one seller. We obtain two results of interest. First, vertical integration may have no coordination value by itself, i.e., vertical integration may not help solving the chicken-and-egg problem. Second, the coordination value of vertical integration in two-sided markets is closely related to the ability of a platform to commit to its downstream price