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Abstract: Many two-sided platforms (like search engines and business directories) make profits from auctioning their user base to advertisers. Yet, auctioning users is different from selling standard goods, since the size of the platform's user base depends on the expected benefit that winning bidders generate to users. In this setting, what is the profit-maximizing mechanism? First, I show that, if the bidders' willingness to pay for the match is positively affiliated with their value to users, the revenue-maximizing mechanism is biased towards bidders with low user values. This distortion foregoes attracting users in order to encourage bidders to pay more for a match. Further, I demonstrate that if bidders appropriate a higher fraction of the total value from the match, then the platform should follow a loss leader strategy: it subsidizes users (in cash or by offering free services) to boost supply and further extract rents from bidders. In turn, when charging or subsidizing users is not feasible, the platform distorts its mechanism to select bidders with high (low) user values as a substitute for the subsidies (charges) it would otherwise implement. In this setting, I show that competition between two-sided platforms leads to higher user surplus, but might decrease total welfare when the supply of users is sufficiently inelastic. This result suggests caution for applying standard antitrust economics to two-sided markets. |