Taxation in Two-Sided Markets

Two-sided platform firms serve distinct groups that are connected through interdependent demand, and include major businesses such as the media industry, banking, and the software industry. A well-known textbook result in one-sided markets is that a government may increase a monopolist’s outcome and reduce the deadweight loss by subsidizing output. The present paper shows that this result need not hold in a two-sided market. On the contrary, a higher ad-valorem tax rate – rather than a subsidy – could increase output and enhance welfare.