Arnold Kling

Peanut Butter Buys Jelly

Arnold Kling, Great Questions of Economics
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Zimran Ahmed comments on the purchase of PayPal by eBay.

PayPal's large number of established accounts gave it some pricing power through charging higher service rates, just as eBay's market power for unique items lets it charge higher auction rates, and summing the two markups lead to higher prices than was optimal for the system as a whole. eBay corrected this by buying PayPal and (I'm guessing) will lower the (combined) transaction prices.

Ahmed points out that when two monopolies sell complementary products or services, consumers actually can be better off if the monopolists combine forces. He links to a math-and-jargon exposition of the theory. For a clear explanation in English, see Peanut Butter, Jelly, and the Antitrust Knife.

Discussion Question. In my essay, I say that separating the monopolists increases their incentives to be compatible with competitors. Is that an issue in the eBay/PayPal case?

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