Two-sided Markets and Matching Design∗

Two-sided markets are markets in which agents match through a platform, which designs and prices matching opportunities. Typical examples include ad-exchanges matching advertisers with publishers; media outlets matching readers/viewers with content providers and advertisers; video-game consoles matching gamers with game developers; operating systems matching end-users with software developers; e-commerce websites matching buyers with sellers; business-to-business platforms matching procurers with service providers; and employment agencies matching employers with job seekers. In the last few years, platform markets have gained a prominent role in the organization of business activities. As a result, a conspicuous literature has flourished examining various aspects of such markets, ranging from pricing to platform design. In this chapter, we focus on monopolistic pricing and its connection to matching design. Section 2 contains a flexible model of platformmediated matching with transfers. Section 3 reviews some of the classical results on monopolistic pricing in two-sided markets. Section 4 extends some of these results to markets in which both the platform and the agents face uncertainty over the distribution of preferences over the two sides of the market and hence over the eventual participation decisions. Section 5 considers markets in which the platform engages in discriminatory practices matching different agents to different subsets of the participating agents from the other side of the market. It first considers the case of one-to-one matching and then the case of manyto-many matching. Throughout the entire chapter, special attention is given to the distortions in the provision of matching services that emerge in two-sided markets when the platform enjoys significant market power.