Negative Network Externalities in Two-Sided Markets: A Competition Approach
AbstractConsider a firm advertising in a job matching agency with the aim of employing the most qualified workers. Its chances of success would be higher for a smaller number of competitor firms advertising in the same job matching agency, i.e. careerbuilder.com. How would the resulting competitive behavior among the firms which are advertising to this job matching agency affect the agency’s optimal pricing behavior? I analyze the optimal market structures and pricing strategies of a monopolist platform in a two-sided market setup in which the agents on each side prefer the platform to be less competitive on their side; that is, a market with negative intra-group network externalities. I find that the equilibrium market structure varies with the extent of negative externalities. If the market’s negative network externalities are substantial, that is, if an agent’s disutility given the size of the agent pool on his side is high (enough), then the profit-maximizing strategy for the matchmaker will be to match the highest types of one side with all of the agents on the other side, by charging a relatively high price from the former side and allowing free entrance for the agents of the latter side. However, if the network externalities on one side are not substantial, then the matchmaker will maximize profits by matching an equal number of agents from each side. This paper thus provides an explanation of the asymmetric pricing schedules in two-sided markets where the matchmaker uses a one-program pricing schedule.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 9746.
Date of creation: 30 Aug 2007
Date of revision:
two-sided market; externalities;
Find related papers by JEL classification:
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-08-06 (All new papers)
- NEP-COM-2008-08-06 (Industrial Competition)
- NEP-LAB-2008-08-06 (Labour Economics)
- NEP-MIC-2008-08-06 (Microeconomics)
- NEP-MKT-2008-08-06 (Marketing)
- NEP-NET-2008-08-06 (Network Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ellison, Glenn & Mobius, Markus & Fudenberg, Drew, 2004.
3043414, Harvard University Department of Economics.
- Glenn Ellison & Drew Fudenberg & Markus Mobius, 2010. "Competing Auctions," Levine's Working Paper Archive 506439000000000092, David K. Levine.
- Glenn Allison & Drew Fudenberg, 2002. "Competing Auctions," Harvard Institute of Economic Research Working Papers 1960, Harvard - Institute of Economic Research.
- Ellison, Glenn & Fudenberg, Drew & Mobius, Markus, 2010. "Competing Auctions," Staff General Research Papers 32106, Iowa State University, Department of Economics.
- Joseph Farrell & Garth Saloner, 1985.
"Standardization, Compatibility, and Innovation,"
RAND Journal of Economics,
The RAND Corporation, vol. 16(1), pages 70-83, Spring.
- BELLEFLAMME, Paul & TOULEMONDE, Eric, 2007.
"Negative intra-group externalities in two-sided markets,"
CORE Discussion Papers
2007039, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Paul Belleflamme & Eric Toulemonde, 2009. "Negative Intra-Group Externalities In Two-Sided Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(1), pages 245-272, 02.
- Paul Belleflamme & Eric Toulemonde, 2007. "Negative Intra-Group Externalities in Two-Sided Markets," CESifo Working Paper Series 2011, CESifo Group Munich.
- BELLEFLAMME, Paul & TOULEMONDE, Eric, . "Negative intra-group externalities in two-sided markets," CORE Discussion Papers RP -2119, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Damiano, Ettore & Li, Hao, 2005.
Microeconomics.ca working papers
damiano-05-01-25-10-08-07, Vancouver School of Economics, revised 18 Oct 2005.
- repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
- Attila Ambrus & Rossella Argenziano, 2004.
"Network Markets and Consumers Coordination,"
Cowles Foundation Discussion Papers
1481, Cowles Foundation for Research in Economics, Yale University.
- Attila Ambrus & Rossella Argenziano, 2004. "Network Markets and Consumer Coordination," CESifo Working Paper Series 1317, CESifo Group Munich.
- Attila Ambrus & Rosella Argenziano, 2004. "Network Markets and Consumer Coordination," IEHAS Discussion Papers 0423, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
- Jullien, Bruno, 2000. "Competing in Network Industries: Divide and Conquer," IDEI Working Papers 112, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jul 2001.
- Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
- Helmuth Cremer & David Bardey & Jean-Marie Lozachmeur, 2009.
"Competition in two-sided markets with common network externalities,"
DOCUMENTOS DE TRABAJO
005937, UNIVERSIDAD DEL ROSARIO.
- David Bardey & Helmuth Cremer & Jean-Marie Lozachmeur, 2014. "Competition in Two-Sided Markets with Common Network Externalities," Review of Industrial Organization, Springer, vol. 44(4), pages 327-345, June.
- Bardey, David & Cremer, Helmuth & Lozachmeur, Jean-Marie, 2009. "Competition in two-sided markets with common network externalities," TSE Working Papers 09-103, Toulouse School of Economics (TSE), revised Oct 2010.
- Bardey, David & Cremer, Helmuth & Lozachmeur, Jean-Marie, 2010. "Competition in two-sided markets with common network externalities," Economics Papers from University Paris Dauphine 123456789/5992, Paris Dauphine University.
- Bardey, David & Cremer, Helmuth & Lozachmeur, Jean-Marie, 2009. "Competition in two-sided markets with common network externalities," IDEI Working Papers 578, Institut d'Économie Industrielle (IDEI), Toulouse, revised Oct 2010.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.