Nonparametric Analysis of Two-Sided Markets
AbstractThis paper considers an empirical semiparametric model for two-sided markets. Contrary to existing empirical literature on two-sided markets, we do not rely on linear network effects. Instead, network effects and probability distribution functions of net benefits of two sides are specified nonparametrically. The demand functions and the network effect functions of readers and advertisers are estimated by nonparametric IV estimation using a data set from German magazine industry. The ill-posed inverse problem faced during the estimation is solved by Tikhonov Regularization. We show that semiparametric specification is supported by the data and the network effects on readers' side are neither linear nor monotonic. With a numerical illustration we demonstrate that the mark-up of the magazine on readers' side is 27% higher with the nonlinearly specified network effects than in the case with linear network effects.
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Bibliographic InfoPaper provided by Department of Economics, University of Bristol, UK in its series Bristol Economics Discussion Papers with number 12/628.
Length: 59 pages
Date of creation: Oct 2012
Date of revision:
Two-sided markets; Network externality; Nonparametric IV; Ill-posed inverse problems; Tikhonov Regularization;
Find related papers by JEL classification:
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-02-08 (All new papers)
- NEP-COM-2013-02-08 (Industrial Competition)
- NEP-ECM-2013-02-08 (Econometrics)
- NEP-NET-2013-02-08 (Network Economics)
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