Two-Sided Markets and Applications to Payments Systems

Anil Jain's research project centers on the principal issues affecting mobile payment systems. While consumers need a large mobile banking infrastructure to be enticed to participate, merchants are unwilling to invest in a new technology without an immediate supply of consumers. Anil's project will generate a research paper that will analyze how two-sided markets operate in competition and whether network effects can be internalized and lead to optimal outcomes.

The research analyzes how different distributions of wealth, different costs of maintaining platforms and endogenous pricing leads to differing outcomes in both platform membership and utilities. It also explores the effects of placebo interventions, such as the impact of subsidizing consumers' access to payment system and how this affects consumer welfare outcomes.The model in the paper assumes that there exists a competitive platform market whereby platforms offer different contracts which detail the number of merchants, the number of users and the quality of the network. The unique competitive equilibrium found in the model facilitates the answer to positive questions such as the optimal mechanism for increasing consumer access. The equilibrium and comparative statics of the model will be computed using Matlab simulations. Furthermore, the model will simulate the impacts of changes in the environment and compute the placebo effects of different schemes on user welfare.

The framework developed in the paper is flexible enough to offer advice for policy makers in terms of different interventions on the equilibrium and subsequent welfare changes. It also demonstrate how the equilibrium may change as some of the parameters of the model change.

Research Questions: 
  • What incentives and prices should be offered to consumers and merchants when their utility preferences depend on the quality and quantity of both merchants and consumers?
  • When are there large platforms?
  • What determines the various constituents of the platform? At what point are there many more consumers compared to merchants?
  • How does subsidizing consumer access to payment systems affect consumer welfare outcomes and is it efficient?
  • What is the optimal intervention of a policy maker -- subsidizing consumer access, subsidizing network fixed costs or subsidizing merchant access?
Data Notes: 


In Progress