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Barriers to network-specific investment

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Author Info
Antoine Martin (Federal Reserve Bank of New York)
Michael Orlando

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Abstract

We examine incentives for network-specific investment and consider the implications for network governance. We model a two-sided market in which participants making payments over a network platform can invest in a technology that reduces the marginal cost of using the platform. A network effect results in multiple equilibria -- either all agents invest and use of the platform is high or no agents invest and use of the platform is low. The high-use equilibrium can be implemented if commitment is feasible. When the platform cannot commit to usage fees, investment in the platform-specific technology will be held-up, thus implementing the low-investment equilibrium. As a result, governance structures necessary to achieve commitment will be preferred to those necessary merely to achieve coordination. For example, mutual ownership by users of a network platform may emerge where users face risk of ex-post renegotiation. Such a governance structure will also be sufficient to avoid low investment attributable to the network effect. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2007.03.001
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Publisher Info
Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 10 (2007)
Issue (Month): 4 (October)
Pages: 705-728
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Handle: RePEc:red:issued:06-205

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Related research
Keywords: Network; Hold-up; Commitment; Two-sided market; Payments;

Find related papers by JEL classification:
E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
G29 - Financial Economics - - Financial Institutions and Services - - - Other
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

References listed on IDEAS
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    Other versions:
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