Deciphering the Two-Sided Market Model of Rochet and Tirole: An Intricate Undertaking

Abstract

One of the most frequently cited articles in the economics literature of this millennium is that on platform competition in two-sided markets by Rochet and Tirole (2003). Yet it is probably also among the least understood. I have several reasons to think so. One is that the two-sided market model of the article is introduced using a highly confusing language and leaving many underlying assumptions unstated. Another is that the text is littered with mathematical formulae with scant explanation of why they are there, and even with mistakes in them. But the most important reason is that the model does not fit the story told around it, and pretends to have a much broader scope than it actually has. In this paper, I spell out the key assumptions and rephrase the model in a more transparent way, so as to unveil what it really stands for. Be prepared for some disappointment!