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Nesting Vertical and Horizontal Differentiation in Two-Sided Markets

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  • Vitor Miguel Ribeiro

    ()
    (CEF.UP and Faculdade de Economia do Porto)

  • João Correia-da-Silva

    ()
    (CEF.UP and Faculdade de Economia do Porto)

  • Joana Resende

    ()
    (CEF.UP and Faculdade de Economia do Porto)

Abstract

We develop a model that is a synthesis of the two-sided markets duopoly model of Armstrong (2006) with the nested vertical and horizontal di erentiation model of Gabszewicz and Wauthy (2012), which consists of a linear city with di erent consumer densities on the left and on the right side of the city. In equilibrium, the high-quality platform sells at a higher price and captures a greater market share than the low-quality platform, despite the indiff erent consumer being closer to the high-quality platform. The di fference between market shares is lower than socially optimal, because of the inter-group externality and because the high-quality platform sells at a higher price. We conclude that a perturbation that introduces a negligible di erence between the consumer density on the left and on the right side of the city may disrupt the existence of equilibrium in the model of Armstrong (2006). Finally, we show that inter-group externalities make it easier to deter an inferior-quality entrant and make it easier for a superior-quality entrant to conquer the market.

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Bibliographic Info

Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 535.

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Length: 34 pages
Date of creation: May 2014
Date of revision:
Handle: RePEc:por:fepwps:535

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Keywords: Two-sided markets; Horizontal differentiation; Vertical differentiation;

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  1. IRMEN, Andreas & THISSE, Jacques-Francois, 1997. "Competition in multi-characteristics spaces: hotelling was almost right," CORE Discussion Papers 1997053, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Farrell, Joseph & Shapiro, Carl, 1987. "Optimal Contracts with Lock-In," Department of Economics, Working Paper Series qt19f324hf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Scotchmer, Suzanne, 1986. "Market share inertia with more than two firms : An existence problem," Economics Letters, Elsevier, vol. 21(1), pages 77-79.
  4. Economides, Nicholas, 1993. "Quality variations in the circular model of variety-differentiated products," Regional Science and Urban Economics, Elsevier, vol. 23(2), pages 235-257, April.
  5. Konstantinos Serfes & Eleftherios Zacharias, 2009. "Location Decisions of Competing Platforms," Working Papers 09-18, NET Institute, revised Aug 2009.
  6. GABSZEWICZ, Jean J. & WAUTHY, Xavier Yves, . "Nesting horizontal and vertical differentiation," CORE Discussion Papers RP -2460, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. António Brandão & João Correia-da-Silva & Joana Pinho, 2010. "Spatial competition between shopping centers," FEP Working Papers 394, Universidade do Porto, Faculdade de Economia do Porto.
  8. Rossella Argenziano, 2008. "Differentiated networks: equilibrium and efficiency," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 747-769.
  9. Griva, Krina & Vettas, Nikolaos, 2011. "Price competition in a differentiated products duopoly under network effects," Information Economics and Policy, Elsevier, vol. 23(1), pages 85-97, March.
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