Business-to-business bargaining in two-sided markets

Abstract

Bargaining regularly takes place on the business-to-business side of two-sided markets. However, little is known about the consequences of these negotiations. In this paper, we allow the platform (or a policy maker) to choose between a standard design (offering posted prices to both sides) or a design with bargaining (offering a posted price to consumers and negotiating with at least some firms). We find that the platform pursues negotiations when it has a strong bargaining position and does so by targeting firms with the largest network effects. While this behavior may appear exploitive, we show that profits and welfare often align across platform designs. This alignment stems from how bargaining incentivizes the platform: Greater platform bargaining power allows the platform to extract more of the network surpluses, since it can convert more of the firm surplus into profits, and this incentivizes the platform to draw in greater participation (generating greater welfare). These results suggest that platform and policy maker preferences often align in this setting.