Wednesday, December 14, 2005

Matching markets and antitrust

Nice article in the Dec 10th issue of The Economist entitled "Matchmakers and Trustbusters."  The article deals with the problem of pricing in twos sided matching markets, that is markets in which the market maker has to coordinate the two sides of a market by the creation of a platform.  An example is a dating service or, in the more high tech realm, an operating system.  The immediate relevance of this economics issue is to the interchange fee chargedy by Visa and Mastercard to retail bankers.  The legal question is whether this fee is set too high, as claimed by the banks.  The difficulty is that the choice of the fee may have very little to do with the marginal cost of the service provided and more to do with the value of the final transaction.  For an economic analysis, see the paper by Rochet and Tirole cited in The Economist article.  David Evans, currently of the Law and Economics Consulting Group, writes that the two sided markets do not require extra scrutiny or a bye under the antitrust laws.  He urges antitrust regulators to understand the nature of the market before proceeding.

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