Price Competition In Two Sided Markets With Heterogeneous Consumers And Network Effects
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Author | : Lapo Filistrucchi |
Publisher | : |
Total Pages | : 52 |
Release | : 2013 |
Genre | : |
ISBN | : |
We model a two-sided market with heterogeneous customers and two heterogeneous network effects. In our model, customers on each market side care differently about both the number and the type of customers on the other side. Examples of two-sided markets are online platforms or daily newspapers. In the latter case, for instance, readership demand depends on the amount and the type of advertisements. Also, advertising demand depends on the number of readers and the distribution of readers across demographic groups. There are feedback loops because advertising demand depends on the numbers of readers, which again depends on the amount of advertising, and so on. Due to the difficulty in dealing with such feedback loops when publishers set prices on both sides of the market, most of the literature has avoided models with Bertrand competition on both sides or has resorted to simplifying assumptions such as linear demands or the presence of only one network effect. We address this issue by first presenting intuitive sufficient conditions for demand on each side to be unique given prices on both sides. We then derive sufficient conditions for the existence and uniqueness of an equilibrium in prices. For merger analysis, or any other policy simulation in the context of competition policy, it is important that equilibria exist and are unique. Otherwise, one cannot predict prices or welfare effects after a merger or a policy change. The conditions are related to the own- and cross-price effects, as well as the strength of the own and cross network effects. We show that most functional forms used in empirical work, such as logit type demand functions, tend to satisfy these conditions for realistic values of the respective parameters. Finally, using data on the Dutch daily newspaper industry, we estimate a flexible model of demand which satisfies the above conditions and evaluate the effects of a hypothetical merger and study the effects of a shrinking market for offline newspapers.
Author | : Jean J. Gabszewicz |
Publisher | : |
Total Pages | : 12 |
Release | : 2007 |
Genre | : |
ISBN | : |
We model duopoly competition between two platforms. They operate in a two-sided market where agents are heterogeneous on both sides of the market and are allowed to multihome. Network effects are captured within a vertical differentiation framework. Under single-homing there exists an interior equilibrium where networks exhibit asymmetric sizes and both firms enjoy positive profits. When all agents are allowed to patronize the two platforms, we show that in equilibrium multi-homing takes place on one side of the market only. Moreover, the only equilibrium exhibiting positive profits for both platforms replicates the collusive outcome.
Author | : Paul Belleflamme |
Publisher | : Cambridge University Press |
Total Pages | : 275 |
Release | : 2021-11-11 |
Genre | : Business & Economics |
ISBN | : 1108625622 |
Digital platforms controlled by Alibaba, Alphabet, Amazon, Facebook, Netflix, Tencent and Uber have transformed not only the ways we do business, but also the very nature of people's everyday lives. It is of vital importance that we understand the economic principles governing how these platforms operate. This book explains the driving forces behind any platform business with a focus on network effects. The authors use short case studies and real-world applications to explain key concepts such as how platforms manage network effects and which price and non-price strategies they choose. This self-contained text is the first to offer a systematic and formalized account of what platforms are and how they operate, concisely incorporating path-breaking insights in economics over the last twenty years.
Author | : Richard Schmalensee |
Publisher | : North Holland |
Total Pages | : 1002 |
Release | : 1989-09-11 |
Genre | : Business & Economics |
ISBN | : |
Determinants of firm and market organization; Analysis of market behavior; Empirical methods and results; International issues and comparision; government intervention in the Marketplace.
Author | : Cento Veljanovski |
Publisher | : |
Total Pages | : 57 |
Release | : 2013 |
Genre | : |
ISBN | : |
This paper sets out the basic economics of network effects and two-sided or multi-sided markets as relevant to antitrust and regulation. Network effects, and the related concept of two- (or multi-) sided markets, are playing an increasing role in antitrust/competition law in the communications sector, computer hardware and software, Computer Ticketing Services (CRS), Automated Teller Machines (ATMs) and credit card schemes sectors to name a few; and also in the evaluation of mergers, industry standards, market structure and competitive behaviour. The discussion begins by defining network effects and the way they alter the economics of market structure, competitive behaviour and pricing. The theory is then applied to concerns over the adoption of industry and product standards, mergers in the communications sector, and the pricing of mobile services. This is followed by an introduction to the theory of two-sided markets. This covers situations where network effects affect consumers in different groups or sides of the market brought together by a third party, such as credit card schemes. The theory of two-sided markets is developed and then applied to some features of credit card schemes. This paper is a module for the Kings College, University of London Postgraduate Diploma/Masters in Economics in Competition Law, 2006/2007.
Author | : group of authors |
Publisher | : Czech Institute of Academic Education z.s. |
Total Pages | : 360 |
Release | : 2015-11-09 |
Genre | : Business & Economics |
ISBN | : 8090579159 |
Proceedings - International Academic Conference on Management, Economics and Marketing in Vienna 2015
Author | : David Easley |
Publisher | : Cambridge University Press |
Total Pages | : 745 |
Release | : 2010-07-19 |
Genre | : Computers |
ISBN | : 1139490303 |
Are all film stars linked to Kevin Bacon? Why do the stock markets rise and fall sharply on the strength of a vague rumour? How does gossip spread so quickly? Are we all related through six degrees of separation? There is a growing awareness of the complex networks that pervade modern society. We see them in the rapid growth of the internet, the ease of global communication, the swift spread of news and information, and in the way epidemics and financial crises develop with startling speed and intensity. This introductory book on the new science of networks takes an interdisciplinary approach, using economics, sociology, computing, information science and applied mathematics to address fundamental questions about the links that connect us, and the ways that our decisions can have consequences for others.
Author | : Jens-Uwe Franck |
Publisher | : Centre on Regulation in Europe asbl (CERRE) |
Total Pages | : 96 |
Release | : 2019-05-08 |
Genre | : Law |
ISBN | : |
With the rise of digital platforms and the natural tendency of markets involving platforms to become concentrated, competition authorities and courts are more frequently in a position to investigate and decide merger and abuse cases that involve platforms. This report provides guidance on how to define markets and on how to assess market power when dealing with two-sided platforms. DEFINITION Competition authorities and courts are well advised to uniformly use a multi-markets approach when defining markets in the context of two-sided platforms. The multi-markets approach is the more flexible instrument compared to the competing single-market approach that defines a single market for both sides of a platform, as the former naturally accounts for different substitution possibilities by the user groups on the two sides of the platform. While one might think of conditions under which a single-market approach could be feasible, the necessary conditions are so severe that it would only be applicable under rare circumstances. To fully appreciate business activities in platform markets from a competition law point of view, and to do justice to competition law’s purpose, which is to protect consumer welfare, the legal concept of a “market” should not be interpreted as requiring a price to be paid by one party to the other. It is not sufficient to consider the activities on the “unpaid side” of the platform only indirectly by way of including them in the competition law analysis of the “paid side” of the platform. Such an approach would exclude certain activities and ensuing positive or negative effects on consumer welfare altogether from the radar of competition law. Instead, competition practice should recognize straightforwardly that there can be “markets” for products offered free of charge, i.e. without monetary consideration by those who receive the product. ASSESSMENT The application of competition law often requires an assessment of market power. Using market shares as indicators of market power, in addition to all the difficulties in standard markets, raises further issues for two-sided platforms. When calculating revenue shares, the only reasonable option is to use the sum of revenues on all sides of the platform. Then, such shares should not be interpreted as market shares as they are aggregated over two interdependent markets. Large revenue shares appear to be a meaningful indicator of market power if all undertakings under consideration serve the same sides. However, they are often not meaningful if undertakings active in the relevant markets follow different business models. Given potentially strong cross-group external effects, market shares are less apt in the context of two-sided platforms to indicate market power (or the lack of it). Barriers to entry are at the core of persistent market power and, thus, the entrenchment of incumbent platforms. They deserve careful examination by competition authorities. Barriers to entry may arise due to users’ coordination failure in the presence of network effect. On two-sided platforms, users on both sides of the market have to coordinate their expectations. Barriers to entry are more likely to be present if an industry does not attract new users and if it does not undergo major technological change. Switching costs and network effects may go hand in hand: consumer switching costs sometimes depend on the number of platform users and, in this case, barriers to entry from consumer switching costs increase with platform size. Since market power is related to barriers to entry, the absence of entry attempts may be seen as an indication of market power. However, entry threats may arise from firms offering quite different services, as long as they provide a new home for users’ attention and needs.
Author | : Kate Ho |
Publisher | : Elsevier |
Total Pages | : 782 |
Release | : 2021-12-09 |
Genre | : Business & Economics |
ISBN | : 0323988873 |
Handbook of Industrial Organization Volume 4 highlights new advances in the field, with this new volume presenting interesting chapters. Each chapter is written by an international board of authors. Part of the renowned Handbooks in Economics series Chapters are contributed by some of the leading experts in their fields A source, reference and teaching supplement for industrial organizations or industrial economists
Author | : Guofu Tan |
Publisher | : |
Total Pages | : 58 |
Release | : 2019 |
Genre | : |
ISBN | : |
This paper studies a general model of price competition among platforms offering differentiated services in multi-sided markets. We incorporate a general form of both within-side and cross-side externalities into a discrete choice model of random utility maximization by consumers on each side of the markets. We consider a two-stage game in which the platforms choose prices (or user fees) simultaneously in the first stage, followed by consumers on all sides simultaneously deciding which platform to join (single-homing) in the second stage. We show that in a symmetric setting with full market coverage, there exists a symmetric equilibrium in prices and the equilibrium price on each side follows a simple rule: The price equals the cost, plus a mark-up due to product differentiation, minus a subsidy due to cross-side externalities. The subsidy to each side accounts for the degree of the aggregate marginal externalities of that side imposed on all the other sides. As competition among platforms increases, both the product differentiation effect and the cross-subsidy are shown to decrease. As such, the price on one side can decrease while the price on another side may increase with the number of platforms. We also discuss the incentives for platforms to merge and the extent of excessive free entry of platforms into the markets as compared to the social optimum. We further compare uniform pricing rule with discriminatory pricing across different sides of the markets and find that the average price across sides under the discriminatory pricing is higher than the uniform price when the externalities are small or when the number of platforms is large. The impacts of consumers' outside options on the equilibrium prices are also studied.