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Antitrust in 60 Seconds: Multi-Sided Business Models

· September 25, 2018

The 60-Second Read:

“Two-sided markets” is a term of art that refers to multi-sided business models, which describe a business model with two or more markets that are related to each other. Multi-sided businesses are companies that have some part of their business operate by connecting different groups of customers. In other words, multi-sided business models refer to those companies or parts of companies that act as a matchmaker. For example, connecting app developers with app users. The unique nature of multi-sided business models, whose price setting formulas must take into account the interaction of the different groups of customers, is challenging from an antitrust analysis perspective.

When conducting an antitrust analysis, failure to take into account the interrelationship of demand between the various set of customers that interact within a multi-sided business model could create the impression that a multi-sided business model is exercising market power or attempting to obtain market power, when in fact, it is not. U.S. and EU courts have looked at multi-sided businesses and reached convergent conclusions, i.e. that all relevant sides of a multi-sided business model have to be taken into account when performing competition analysis.

What are multi-sided business models?

Multi-sided business models, also called two-sided markets, are companies that provide services by bringing together two or more sets of customers. In a way, these companies bring about efficiencies to the markets by acting as facilitators of connections to various group of customers that would otherwise wouldn’t be connected as easily.

Multi-sided business models are not new. In the 2016 book Matchmakers, economists David Evans and Richard Schmalensee note that multi-sided markets have been recorded as early as eleventh century BCE. Then, literal matchmakers were women who would track eligible single men and women to suggest suitable marriages. A more modern example provided by Evans and Schmalensee is shopping malls. The mall owner will invest heavily in free amenities for customers and give discounted leases to high-draw retailers because the increased foot traffic brings in new sales for other stores. These other stores pay the costs in higher rental fees, but receive more traffic than if they were alone.

Multi-sided business models have also been deeply studied by European economists. In fact, while matchmakers are historically ubiquitous, the way they operated was actually not that obvious until nobel laureate Jean Tirole and Jean-Charles Rochet released their 2003 paper Platform Competition in Two-Sided Markets. Tirole and Rochet explained multi-sided business models by using the example of video game platforms. These platforms sell their video game consoles as loss leaders, while making profit on per-unit royalties through video games and the sale of development kits. The below-cost price for consoles ensures a much greater number of customers are on the platform making the platform more valuable to game developers, who in turn pay the console developers the profits necessary to run a successful business. These practices don’t make sense if you look at all customers as being equal, but make a lot of sense when viewed as facilitators bringing different sets of of customers together in a way that benefits all.

Multi-sided business models are important in the tech industry because the Internet has allowed many companies to provide valuable services to consumers for free by charging businesses who also benefit from the use of the platform. An example given by Evans and Schmalensee’s Matchmakers is the website OpenTable. The website makes it easy to find restaurants with tables available and to book reservations, certainly a valuable and time-saving feature for consumers. OpenTable is also useful for restaurants because it makes it easier for them to fill their open tables. Because restaurants are willing to pay for restaurant-goers to use this service, as long as it helps restaurants fill tables, restaurant-goers get to use OpenTable for free. However, OpenTable users also have a responsibility to cancel any reservations they won’t be able to show for. This commitment increases the value of reservations through OpenTable for restaurants.

What do multi-sided markets have to do with antitrust?

Matchmakers bring about efficiencies to markets through being able to structure flexible payment models that encourage a level of use that maximizes the benefits to all participants. But these business models also create challenges that are somewhat unique to multi-sided markets, and multi-sided platforms must account for groups of customers that have different wants and needs. These price structures often involve one side paying for benefits obtained by the other side in exchange for something of value, like being exposed to advertising. These complex business models pose antitrust challenges when defining the relevant market and analyzing competition issues like whether a firm has market power or not.

Competition law looks to correct certain activity that abuses market power to harm competition or seeks to unfairly obtain market power. Much of this bad behavior concerns pricing – either inflating prices to monopoly levels or reducing prices to a below-cost level that competitors can’t match and, therefore, must leave the market. To perform the antitrust analysis, as explained in previous installments of the “Antitrust in 60 Seconds” series, the relevant market where the anticompetitive behavior is allegedly taking place need to be defined. This is where the main antitrust difficulty exists when confronting multi-sided business models because there can be many related markets.

Correctly identifying monopoly pricing or predatory pricing requires courts to account for market realities that affect such behavior, as established by the Supreme Court in Trinko and BMI v. CBS. For multi-sided business models, this means that when defining the relevant market to determine whether a firm has engaged in anticompetitive behavior, all the relevant sides of the multi-sided business model need to be taken into account. This is because some business models rely on encouraging use of their services through free or below-cost pricing that is charged to one group of customers, while charging the complete cost of this service to another group of customers who benefit from greater use of the service. Without accounting for these interactions, the business can appear to be engaged in predatory or monopoly pricing, depending on which side you are looking at.

In the OpenTable example, looking at each side in isolation will give you the wrong impression on what is going on from a competition standpoint. On the restaurant-goers’ side, giving consumers a valuable service for free looks like predatory pricing. This service costs money to perform, and therefore it looks like below cost pricing. On the restaurants’ side, prices may be higher because the restaurants are paying for both sides of the transaction. This may look like monopoly pricing. Neither view is correct because of how both sides are interacting. It’s also important to note that a key feature of OpenTable is that it is so appealing to restaurant-goers because it is free and easy to use, and this increased participation makes it appealing to restaurant owners who get access to a large group of potential customers to fill their tables. If OpenTable charged each side for their use, it would lose much of its appeal for both groups of customers and may not be as successful.

How do courts look at multi-sided business models?

The general way courts have accounted for multi-sided businesses in competition cases is through market definition. This is best shown in two EU cases that were decided in 2014. In Groupement des cartes bancaires and MasterCard, cases involving payment cards, the EU Court of Justice provided guidance on how courts are to analyze multi-sided markets. The Court of Justice in Cartes Bancaires stated that courts are to take into account the real conditions of the functioning and structure of markets, and that these aspects are due consideration “when that aspect is the taking into account of interactions between the relevant market and a different related market . . . and, all the more so, when . . . there are interactions between the two facets of a two-sided system.” In MasterCard, where the Court of Justice upheld the European Commission’s enforcement decision, the Court further explained that one has to take into account any factor that is relevant to the assessment of restriction of competition regardless of the market which that factor concerns. The Court determined that the lower courts sufficiently took into account factors from both sides of the market.

In France, Google was fined $660,000 for providing Google Maps for free, on the basis that this was predatory pricing. This decision was overturned in 2015 by the Paris Court of Appeal. The Court ruled that the test used by the lower court was wrong, and that when revenue from other sources was taken into account there was plenty evidence that prices were above cost. The Court specifically noted that “[i]t may be rational to offer products or services for free on a market not to oust competitors but to increase the number of users on another market”, and that “the free business model is quite widespread on electronic markets.” Had this ruling not been overturned, many internet services could have been challenged in France simply for providing free services.

The recent U.S. Supreme Court case Ohio v. American Express has mostly aligned U.S. law with EU law on treatment of multi-sided markets. There, the Court stated that the relevant market in a multi-sided market case should comprise of all (in this case two) relevant sides of the markets that conditioned the price setting strategies.


Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.