Technology Shocks in Multi-Sided Markets: The Impact of Craigslist onLocal Newspapers

Theories of multi-sided markets suggest that a platform's pricingstrategies on different sides of the market are closely linked, and inparticular, an increase in competition on one side may lead to anincrease in price on other sides. We empirically examine platforms'pricing strategies by exploiting the gradual expansion of Craigslist, awebsite providing classified ads services, into local newspaper markets.We adopt a differences-in-differences approach by comparing the pricingstrategies of local newspapers for which classified ads are likely to bea significant portion of their revenue to others before and afterCraigslist's entry. We find that these newspapers drop their classifiedad rates significantly more after Craigslist's entry. We also find thatthe impact of the entry of Craigslist propagates to other sides of thenewspaper market. These newspapers increase their subscription ratesrelative to others, and consequently, their circulation also drops more.Finally, lower circulation also leads to lower display ad rates forthese newspapers. Our study helps build an understanding of howincumbent media platforms respond to technologically disruptive entrantsin multi-sided markets.