The Theory of Two-sided Markets: an Economic Bubble?

Markets’ two-sidedness has been a much discussed topic in modern economic scholarship. Hundreds of academic papers have been written about it in the last ten years. The concept has also veered into antitrust policy, with applications in major jurisdictions such as the United States (“US”), China, and recently, the European Union (“EU”). At this juncture, the question arises whether the buzz around two-sided markets is not giving rise to a bubble in academic and policy circles. This paper vindicates caution. I. Uprisings, Fables, Zombies and ... Bubbles In industrial economics, failed revolutions happen. In the early 1980s, Baumol, Panzar and Willig wrote their famous “contestable markets” theory. In his 1982 address before the American Economic Association, William Baumol characterized it as an “uprising in the theory of industry structure” (Baumol, 1982). The self-titled “theory” took a life of its own. Scholars refined it. The contestable markets theory subsequently served as a blueprint for competition reformists to push a “small” antitrust agenda. As Martin puts it, “the theory of contestable markets aspired to be all things to all people” (Martin, 2000). Subsequent advances in economic researches however nuanced its relevance, stressing the restrictive postulates (Schwartz and Reynolds, 1983; Weitzmann, 1983) and extreme conditions under which it was built (Sheperd; 1984). Decades later, little of its “laissez faire” implications have made way through antitrust practice. In industrial economics, “fables” (or “fairy tales”) are not uncommon too. CasadesusMasanell and Spulber write that “The dismal science is enlivened occasionally by colorful fables that illustrate key points of economic theory” (2000). The acquisition of Fisher-Body by General Motors has been for instance romanced as a prime example of contract opportunism (Klein, Crawford and Alchian, 1978), in disregard of the underlying facts (Coase, 2000). Other fables include the failure of the Dvorak keyboard to prevail over the QWERTY standard due to network externalities (Tirole, 1988) and lock-in effects, despite alleged the alleged superiority of the former (Liebowitz and Margolis, 1999). Those fables have nurtured important policy developments, including regulatory assaults on hold-up by  Research fellow and Phd Student, University of Liège (ULg), Liege Competition and Innovation Institute (“LCII”).  Professor, University of Liege (ULg), Liege Competition and Innovation Institute (“LCII”). [email protected]. Working paper, please do not circulate, quote or cite without permission of the authors 2 intellectual property owners or antitrust enforcement against de facto standards in the digital