Two-Sided Network Effects: A Theory of Information Product Design
AbstractHow can firms profitably give away free products? This paper provides a novel answer and articulates trade-offs in a space of information product design. We introduce a formal model of two-sided network externalities based in textbook economics---a mix of Katz and Shapiro network effects, price discrimination, and product differentiation. Externality-based complements, however, exploit a different mechanism than either tying or lock-in even as they help to explain many recent strategies such as those of firms selling operating systems, Internet browsers, games, music, and video. The model presented here argues for three simple but useful results. First, even in the absence of competition, a firm can rationally invest in a product it intends to give away into perpetuity. Second, we identify distinct markets for content providers and end consumers and show that either can be a candidate for a free good. Third, product coupling across markets can increase consumer welfare even as it increases firm profits. The model also generates testable hypotheses on the size and direction of network effects while offering insights to regulators seeking to apply antitrust law to network markets.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 51 (2005)
Issue (Month): 10 (October)
network effects; network externalities; two-sided markets; free information; business models; strategic complements; product design;
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Fabio Maria Manenti & Ernesto Somma, 2010.
"Plastic Clashes: Competition Among Closed and Open Payment Systems,"
"Marco Fanno" Working Papers
0111, Dipartimento di Scienze Economiche "Marco Fanno".
- Fabio M. Manenti & Ernesto Somma, 2011. "Plastic Clashes: Competition Among Closed And Open Payment Systems," Manchester School, University of Manchester, vol. 79(6), pages 1099-1125, December.
- Heinz, B. & Graeber, M. & Praktiknjo, A.J., 2013. "The diffusion process of stationary fuel cells in a two-sided market economy," Energy Policy, Elsevier, vol. 61(C), pages 1556-1567.
- Tim COWEN & Annabelle GAWER, 2012. "Competition in the Cloud: Unleashing Investment and Innovation Within and Across Platforms," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(85), pages 45-62, 1st quart.
- Filistrucchi, L. & Geradin, D.A.A.G. & Damme, E.E.C. van, 2012.
"Identifying Two-Sided Markets,"
2012-008, Tilburg University, Tilburg Law and Economic Center.
- Elizabeth J. Altman & Mary Tripsas, . "Product to Platform Transitions: Organizational Identity Implications," Harvard Business School Working Papers 14-045, Harvard Business School.
- Marco Antonielli & Lapo Filistrucchi, 2012.
"Collusion and the Political Differentiation of Newspapers,"
Working Papers - Economics
wp2012_07.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
- Filistrucchi, L. & Antonielli, M., 2012. "Collusion and the Political Differentiation of Newspapers," Discussion Paper 2012-014, Tilburg University, Tilburg Law and Economic Center.
- Marco Antonielli & Lapo Filistrucchi, 2011. "Collusion and the political differentiation of newspapers," Working Papers 11-26, NET Institute, revised Nov 2011.
- Filistrucchi, L. & Antonielli, M., 2012. "Collusion and the Political Differentiation of Newspapers," Discussion Paper 2012-024, Tilburg University, Center for Economic Research.
- Haucap, Justus & Heimeshoff, Ulrich, 2013. "Google, Facebook, Amazon, eBay: Is the internet driving competition or market monopolization?," DICE Discussion Papers 83, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
- Elizabeth J. Altman & Frank Nagle & Michael L. Tushman, 2013. "Innovating without Information Constraints: Organizations, Communities, and Innovation When Information Costs Approach Zero," Harvard Business School Working Papers 14-043, Harvard Business School.
- Lopez, Henry & Vanhaverbeke, Wim, 2009.
"How innovation intermediaries are shaping the technology market? An analysis of their business model,"
27016, University Library of Munich, Germany, revised 2010.
- Lopez, Henry & Vanhaverbeke, Wim, 2009. "How innovation intermediaries are shaping the technology market? An analysis of their business model," MPRA Paper 20458, University Library of Munich, Germany, revised 2010.
- Claire M. Weiller & Michael G. Pollitt, 2013. "Platform Markets and Energy Services," Cambridge Working Papers in Economics 1361, Faculty of Economics, University of Cambridge.
- Evens, Tom, 2010. "Challenging content exclusivity in network industries: the case of digital broadcasting," 21st European Regional ITS Conference, Copenhagen 2010: Telecommunications at new crossroads - Changing value configurations, user roles, and regulation 12, International Telecommunications Society (ITS).
- Amel Attour & Maëlle Della Peruta, 2013. "Le rôle des connaissances architecturales dans l’élaboration de la plateforme technologique d’un écosystème en émergence: le cas des plateformes NFC," GREDEG Working Papers 2013-15, Groupe de REcherche en Droit, Économie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
- Kevin J. Boudreau & Andrei Hagiu, 2008. "Platform Rules: Multi-Sided Platforms as Regulators," Harvard Business School Working Papers 09-061, Harvard Business School.
- Fiedler, Ingo C, 2010. "Antitrust in two-sided markets: Is competition always desirable?," Berkeley Olin Program in Law & Economics, Working Paper Series qt5dp3q033, Berkeley Olin Program in Law & Economics.
- Chiao, Benjamin & MacKie-Mason, Jeffrey, 2012. "Using uncensored communication channels to divert spam traffic," Information Economics and Policy, Elsevier, vol. 24(3), pages 173-186.
- Haucap, Justus & Wenzel, Tobias, 2011. "Wettbewerb im Internet: Was ist online anders als offline?," DICE Ordnungspolitische Perspektiven 16, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
- Claussen, Jörg & Kretschmer, Tobias & Mayrhofer, Philip, 2010. "Private Regulation by Platform Operators – Implications for Usage Intensity," Discussion Papers in Business Administration 11374, University of Munich, Munich School of Management.
- Marc Rysman, 2009. "The Economics of Two-Sided Markets," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 125-43, Summer.
- Narayanan, V.K. & Chen, Tianxu, 2012. "Research on technology standards: Accomplishment and challenges," Research Policy, Elsevier, vol. 41(8), pages 1375-1406.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.