We investigate the welfare effects of third-degree price discrimination by a two-sided
platform that enables interaction between buyers and sellers. Sellers are heterogenous with
respect to their per-interaction benefit, and, under price discrimination, the platform can
condition its fee on sellers’ type. In a model with linear demand on each side, we show
that price discrimination: (i) increases participation on both sides; (ii) enhances total
welfare; (iii) may result in a Pareto improvement, with both seller types being better-off
than under uniform pricing. These results, which are in stark contrast to the traditional
analysis of price discrimination, are driven by the existence of cross-group network effects.
By improving the firm’s ability to monetize seller participation, price discrimination induces the platform to attract more buyers, which then increases seller participation. The
Pareto improvement result means that even those sellers who pay a higher price under
discrimination can be better-off, due to the increased buyer participation. Our findings
provide clear and relevant managerial and policy implications.