In this paper, we extend the Areeda–Turner rule to two-sided markets. We do so by following the original logic of Areeda and Turner (1975). In their seminal article, the authors set out to identify a rational dividing line between legitimately competitive prices and prices that should be regarded as predatory. Adopting the classical definition of predation as the deliberate sacrifice of present revenues for the purpose of driving rivals out of the market and then recouping the losses, they proposed that “[u]nless at or above average cost, a price below reasonably anticipated (1) shortrun marginal costs or (2) average variable costs should be deemed predatory, and the monopolist may not defend on the grounds that his price was ‘promotional’ or merely met an equally low price of a competitor”. In addition “[r]ecognizing that marginal cost data are typically unavailable” they concluded that “[a] price below reasonably anticipated average variable cost should be conclusively presumed unlawful”.Footnote 1

Following the original logic of Areeda and Turner (1975), we seek a threshold for the price, such that a price below this threshold should be deemed predatory. We argue that such a threshold needs to take into account the specificity of two-sided markets. In these markets firms act as platforms and sell two different products or services to two distinct groups of customers.Footnote 2 An example is the newspaper market, in which publishers sell content to readers and advertising slots to advertisers.

A two-sided market is further characterised by indirect network externalities between the two groups of users. These arise when the utility (or the profits) obtained by a customer (whether a final consumer or a firm) of one group depends on the number of customers of the other group and the two groups of customers do not internalise these externalities.Footnote 3

In the case of newspapers, advertisers place a greater value on advertising in a given newspaper the more readers the newspaper has. Readers may or may not be affected by the amount of advertising in the newspaper,Footnote 4 but for the market to be two-sided already the presence of one indirect network effect is sufficient.Footnote 5

Whereas customers do not internalize the externality (or externalities) above, two-sided platforms do internalize it (them) when deciding their optimal pricing strategies. As a result, the profit-maximizing prices by two-sided platforms may be very different from those charged by firms in one-sided markets.

As pointed out by Rochet and Tirole (2006), in a two-sided market, where two products or services are sold to two groups of customers, one can distinguish the price level from the price structure. The price level is the sum of the two prices, while the price structure is the ratio of the two prices. When the unit of measurement of the goods or services sold on the two-sides are different and the matching of customers on the two sides is not one to one, the price level is not simply the sum of the two prices, but rather the sum of the two prices expressed in the same unit of measurement.

In the case of newspapers the price level is the sum of the cover price and the per-copy advertising revenues.Footnote 6 Similarly, the price structure is the ratio of the two.Footnote 7 In two-sided markets not only the price level but also the price structure determines firms’ profits. For instance, the profits of a publisher not only depend on how much revenues per copy of the newspaper it can raise but also on what percentage of revenues comes from readers versus advertisers: For a given revenue per copy, a business strategy that charges only readers may not be as profitable as one that charges only advertisers. Indeed, we observe free newspapers more often than we observe no-advertising newspapers.

The difference in pricing strategies that characterizes two-sided markets warrants in many instances a different antitrust treatment. A recent review discussing these issues is Evans and Schmalensee (2015).

Parker and Alstyne (2005) were among the first to present an economic model that highlights that in two-sided markets pricing below marginal cost on one side may be a (nonstrategic) profit-maximising strategy. Indeed, by pricing below marginal cost on one side of the market a firm increases sales on that side, thus boosting demand and profits on the other side. Wright (2004) included the claim that “price below marginal cost on one side of the market is a sign of predation” among the eight fallacies that derive from applying a one-sided logic to two-sided markets.Footnote 8

Despite the warnings of the economics literature, competition authorities and courts tend to analyse predatory claims with a one-sided logic. In the recent case Bottin Cartographes versus Google,Footnote 9 for instance, the Commercial Court of Paris found Google guilty of the abuse of a dominant position in the market for online maps that allow stores’ geolocation.Footnote 10 The Court reached its decision by simply considering that the price of Google Maps API, being equal to 0 €, was necessarily lower than the production costs of the service. Interestingly, the Court stopped just short of recognizing the implications for competition policy of the two-sided business strategy of Google, as it recognized that Google, according to the contracts, would be able to insert advertising in its Google Maps API service and therefore sell targeted advertising.

Judgements such as the one above may partly be due to the fact that most policy contributions so far, such as Wright (2004), have criticized the application of the one-sided Areeda–Turner rule to two-sided markets without suggesting an alternative. Even those policy contributions, such as Fletcher (2007) or Evans and Noel (2008), that recognized the necessity to provide guidance to practitioners fall short of providing new applicable methods. In fact, when Google appealed the decision of the Commercial Court of Paris, the Court of Appeal of ParisFootnote 11 decided to suspend the proceeding and ask the French Competition Authority to deliver an opinion on whether Google’s conduct had to be considered anticompetitive.Footnote 12 The request of the Court of Appeal highlights the uncertainty among practitioners with regard to criteria to establish predatory pricing in two-sided markets.

We contribute to filling this gap by explaining how one should modify the Areeda–Turner rule to account for the two-sidedness of a market. Testing for predatory pricing in a two-sided market must take into account the presence of the indirect network effects between the two sides. Hence, it has to recognize that price-cost margins on the two sides of the market are interrelated. We thus show that one needs to compare the overall price level with the joint marginal cost of the two-sides of the market. Since, as already noted by Areeda and Turner (1975), marginal cost data are difficult to obtain, one should compare the overall price level with the overall average variable cost.

Filistrucchi et al. (2013) point out that there exist two-types of two-sided markets. Two-sided non-transaction markets are characterized by the absence of a transaction between the two sides of the market and, even though an interaction is present, it is usually not observable, so that a per-transaction (or per-interaction) fee or a two-part tariff is not possible. Typical examples are media markets. Two-sided transaction markets are instead characterized by the presence and observability of a transaction between the two groups of platform users. As a result, the platform is able to charge not only a price for joining the platform, but also one for using it, i.e. it can ask a two-part tariff. Examples in this category include payment cards schemes, virtual marketplaces, auction houses and operating systems.

The extension of the Areeda–Turner rule that we develop is in line with the suggestion by Evans (2003) for transaction markets.Footnote 13 This suggestion was however not derived from a formal model. In addition, Evans (2003) recognized the difficulty in providing guidance as to how to implement the test in two-sided non-transaction markets. Our formulas, which are derived from the application of the same logic as Areeda and Turner (1975), are applicable instead to two-sided non-transaction markets, such as the market for newspapers that we consider in Sect. 3. However, following the same approach also for two-sided transaction markets, one would indeed obtain similar formulas to those proposed by Evans (2003).

Discussing predatory pricing in two-sided transaction markets, Fletcher (2007) suggested that a predatory pricing rule should be drawn from the finding in Rochet and Tirole (2006) that the markup on each side of a two-sided market can be calculated as in a one-sided market, with the caveat that from the marginal cost one needs to subtract any extra revenue that the extra sales on that side of the market generate on the other side of the market. It turns out that the latter intuition is, to some extent, true also for two-sided non-transaction markets. By deriving our conditions from a formal model, we explain what this extra term is in a two-sided non-transaction market and highlight that one also needs to take into account the extra cost incurred on the other side of the market.

We then apply our two-sided Areeda–Turner rule to two cases in the newspaper industry. We first look at the price war in the UK quality daily newspapers in the ’90s and test whether the pricing strategy of The Times from September 1993 to December 1995 was an example of predatory pricing, as claimed by its competitors, particularly by the Independent. The case was investigated by the Office of Fair Trading (OFT) which concluded against the existence of predatory behaviour.

The case enjoyed considerable publicity at the time for its political implications and has not ceased to be debated, not only because the OFT decision, whether right or wrong, did not include much empirical investigation but also because, looking at it today in light of the theory of two-sided markets, it is striking that the OFT did not carry out any analysis of the advertising market. We show that, had it done so, it would have found that the pricing strategy of the Times was probably not predatory, even taking for granted the cost estimates of The Independent, according to which the Times was sold to readers at a price below average variable cost.

We then discuss the case of Aberdeen Journals, whose pricing strategies between 1996 and 2000 were also investigated by the OFT. It was a case of alleged predation that involved free newspapers in Scotland. The OFT and the Competition Appeal Tribunal (CAT) calculated price-cost margins and concluded that the advertising prices that were set by Aberdeen Journals in response to the entry of Aberdeen & District Independent were below average variable costs and, therefore, predatory. We argue that, although readers did not pay for the newspapers, the OFT took the right approach in taking into account also the costs incurred on the readers side.

The paper is organised as follows: Sect. 2 compares monopoly pricing in two-sided markets to monopoly pricing in one-sided markets and extends the one-sided Areeda–Turner rule to two-sided markets. In Sect. 3 we analyse the two cases of alleged predatory behaviour in the market for daily newspapers, namely the Times versus Independent war and the Aberdeen Journals case. Section 4 concludes.