Business-to-Business Bargaining in Two-Sided Markets

Abstract

Negotiations regularly take place on the business-to-business side of two-sided markets. However, little is known about the consequences of these negotiations on a platform's design, pricing, participation, and welfare. In this paper, we propose a model where platforms choose between the standard design (offering posted prices to both sides) and the bargaining design (offering a posted price to consumers and negotiating with firms). We find that platforms implement the bargaining design only when its bargaining position is strong. We also find that (i) greater platform bargaining power increases welfare and (ii) that a platform's optimal design can coincide with the design that maximizes welfare. These findings suggest that platforms and policy makers often align. Finally, we extend our model to consider platform competition and show that an implemented bargaining design generates sub-optimal welfare only when platforms are competitive. This suggests that platform behavior that may be considered exploitive, is only implemented in a manner that is detrimental to welfare in markets where platform market power is already limited.