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Abstract: Many two-sided platforms (such as search engines and business directories) make profits from auctioning their user base to advertisers. Yet, auctioning users is different from selling standard commodities, since the participation decision by users (and, therefore, the size of the platform's user base) depends on the benefit users expect to receive from joining the platform. In this setting, what is the profit-maximizing auction? And how should a platform structure its user fees? First, I show that if bidders profit from the match more than users, it is optimal for the platform to offer subsidies to users, and recoup losses on the user side of the market by inducing aggressive bidding on the bidder side (loss leader strategy). Second, I show that if the bidders' willingness to pay for the match is positively affiliated with the value users derive from bidders, the revenue-maximizing mechanism favors bidders with low values to users (search diversion). In turn, when charging or subsidizing users is not feasible, the platform favors bidders with high (low) user values as a substitute for the subsidies (fees) it would otherwise implement. In this setting, I also show that competition between two-sided platforms can decrease total welfare when the supply of users is sufficiently inelastic. This result implies that applying standard antitrust economics to two-sided markets may be misleading. |