The Elasticity Pricing Rule for Two-sided Markets: A Note

Abstract

Rochet and Tirole have derived an elasticity rule for relative prices in two-sided markets. This rule is seen as counterintuitive because it seems to imply that the "more elastic side of the market" is charged more. In this note it is argued that this interpretation is based on the assumption that elasticity of demand can be treated as a parameter. If elasticity is treated as function of price, the Rochet-Tirole rule is perfectly in line with economic intuition.