A two-sided, pair-wise matching model is developed to analyse the strategic interaction between two information intermediaries who compete in commission rates and network size, giving rise to a fragmented duopoly market structure. The model suggests that network competition between information intermediaries has a distinctive market structure, where intermediaries are monopolist service providers to some contacts but duopolists over contacts they share in their network overlap. The intermediaries` inability to price discriminate between the competitive and non-competitive market segments, gives rise to an undercutting game, which has no pure strategy Nash equilibrium. The incentive to randomise commission rates yields a mixed strategy Nash equilibrium. Finally, competition is affected by the technology of network development. The analysis shows that either a monopoly or a fragmented duopoly can prevail in equilibrium, depending on the network-building technology. Under convexity assumptions, both intermediaries invest in a network and compete over common matches, while randomising commission rates. In contrast, linear network development costs can only give rise to a monopolistic outcome.
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number
371.
Find related papers by JEL classification: F10 - International Economics - - Trade - - - General C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
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