Gender-Based Price Discrimination at the Nightclub
This is the first of a two-post series on two-sided markets, a relatively new idea in the economic theory of markets (developed circa 2000). Two-sided market theory more realistically models certain types of markets. In such markets empirical evidence is often inconsistent with conventional (one-sided) market theory but can be shown to reflect rational firm behavior with a two-sided perspective. This post explains the term and related concepts. The second post will explore the extent to which the idea can be applied to the market for health insurance.
We begin with a bit of plausible fiction. Dude, the proprietor of the new nightclub Dude’s Club, charges men and women the same price (parity pricing) to enter his establishment. One day, in going over his records, he noticed something. On the rare nights for which the numbers of women and men attending were roughly equal, he made a tremendous profit in bar sales. But typically the number of women was far below the number of men and he lost money.
Being a profit-maximizing sort of guy, Dude decided to try to attract more women to his club so that the typical night became profitable. After experimenting with the level of entry fee, he had a winning idea: let women enter for free and charge men twice the original price. This generated a gender mix that was roughly equal. Unbeknownst to Dude, he had discovered that his was a two-sided market. (In his (quite accessible) 2004 Review of Network Economics paper titled “One-sided Logic in Two-sided Markets“, Julian Wright also uses the heterosexual nightclub market to explore concepts in two-sided markets. He then proceeds to apply the concepts to credit card schemes.)
A two-sided market is one in which the volume of transactions is sensitive to how the total transaction price is allocated between two distinct groups of market participants (see definition 1 of this paper by Rochet and Tirole). Dude discovered...