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Comparing Monopoly and Duopoly on a Two-Sided Market without Product Differentiation

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  • Böhme, Enrico
  • Müller, Christopher

Abstract

We propose both a monopoly and a duopoly model of a two-sided market. Both settings are fully comparable, as we impose a homogeneous good produced at zero costs without capacity constraints, as well as identical parameterization of market sizes. We determine the duopoly equilibrium and the monopoly optimum in terms of the parameters and obtain solutions with and without subsidization (prices below marginal cost) of one market side. We show that there exists a continuum of economically plausible parameter sets for which duopoly equilibrium prices exceed optimal monopoly prices and one with no observable price effect of competition, i.e. one where optimum and equilibrium prices become equal. Despite the fact that virtually everything except for the number of platform operators is identical in the latter situations, total demand on both market sides in the duopoly market exceeds total demand in the monopoly market. Furthermore, even though there is no observable price effect, there is still a competitive effect in so far that total profits in the duopoly equilibrium are strictly smaller than monopoly profits. The relationship of total welfare is ambiguous in subsidization cases, while it is strictly greater in duopoly, if no subsidization takes place. Our results sharply contradict economic intuition and common economic knowledge from one-sided markets.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23568.

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Date of creation: 29 Jun 2010
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Handle: RePEc:pra:mprapa:23568

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Keywords: two-sided markets; platform competition; price-concentration relationship; welfare analysis;

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  1. GABSZEWICZ, Jean J. & LAUSSEL, Didier & SONNAC, Nathalie, 2000. "TV-broadcasting competition and advertising," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2000006, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Marc Rysman, 2004. "Competition Between Networks: A Study of the Market for Yellow Pages," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 483-512.
  3. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers 152, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. ANDERSON, Simon P. & GABSZEWICZ, Jean J., 2005. "The media and advertising : a tale of two-sided markets," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2005088, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Jonas Hackner & Sten Nyberg, 2008. "Advertising and Media Market Concentration," Journal of Media Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 21(2), pages 79-96.
  6. Nilssen,T. & Sorgard,L., 2001. "The TV industry : advertising and programming," Memorandum 18/2001, Oslo University, Department of Economics.
  7. Dewenter, Ralf, 2006. "Das Konzept der zweiseitigen Maerkte am Beispiel von Zeitungsmonopolen," Working Paper 53/2006, Helmut Schmidt University, Hamburg.
  8. Chaudhri, Vivek, 1998. "Pricing and efficiency of a circulation industry: The case of newspapers," Information Economics and Policy, Elsevier, vol. 10(1), pages 59-76, March.
  9. Kaiser, Ulrich & Song, Minjae, 2009. "Do media consumers really dislike advertising? An empirical assessment of the role of advertising in print media markets," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 292-301, March.
  10. Kenneth C. Wilbur, 2008. "A Two-Sided, Empirical Model of Television Advertising and Viewing Markets," Marketing Science, INFORMS, vol. 27(3), pages 356-378, 05-06.
  11. Victor Ginsburgh & David Throsby, 2006. "Handbook of the economics of art and culture," ULB Institutional Repository 2013/1673, ULB -- Universite Libre de Bruxelles.
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