Private contracts in two‐sided platforms

Abstract

We study a platform that connects buyers and sellers, and signs private contracts with sellers. Secret contracting implies interrelated hold-up problems for buyers and sellers that reduce platform pro ts and welfare. We nd that by increasing its control over sellers’ prices, the platform is able to increase price transparency and commit not to behave opportunistically, which increases platform pro ts and welfare. Therefore, enhancing the market power of a dominant platform may increase welfare, which implies that policy prescriptions for dealing with contractual secrecy are reversed in the case of two-sided platforms. Our results explain the widespread use (and social desirability) of price-forcing contracts, the subscription-based, retailer, and merchant business models, and vertical integration by platforms. We also nd that a platform may bene t from an erosion of its market power on one side of the market if this raises the surplus it can o er to the other side. This result obtains when buyers are less informed than sellers about platform prices, in which case an improvement in sellers’ information may lead to worse outcomes for the platform and society.