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Endogenous Network Effects

Author

Listed:
  • Dewenter, Ralf

    (Helmut Schmidt University, Hamburg)

  • Löw, Franziska

    (Helmut Schmidt University, Hamburg)

Abstract

In contrast to traditional business models, two-sided platforms internalize indirect network effects that exist between different groups of platform participants. The strength of the network effects has a decisive influence on the success of the platform and its market position. Markets with particularly strong network effects are also often characterized by a high degree of concentration. However, the strength of the network effects is not exogenously given but can be influenced by targeted investment. This paper analyses how platforms can affect network effects by investing in appropriate infrastructure, data, or artificial intelligence. We derive optimal quantities, prices, profits, and investments depending on different types of investments.

Suggested Citation

  • Dewenter, Ralf & Löw, Franziska, 2022. "Endogenous Network Effects," Working Paper 194/2022, Helmut Schmidt University, Hamburg.
    • Handle: RePEc:ris:vhsuwp:2022_194
    as

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    References listed on IDEAS

    as
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    5. Nagel, Korbinian, 2016. "A Life Course Perspective on the Income-to-Health Relationship: Macro-Empirical Evidence from Two Centuries," Working Paper 171/2016, Helmut Schmidt University, Hamburg.
    6. Wenzel, Daniela, 2018. "Droughts and Corruption," Working Paper 181/2018, Helmut Schmidt University, Hamburg.
    7. Ross, Harm Hauke, 2019. "Second-hand price volatility of green ships: an empirical analysis across main shipping segments," Working Paper 182/2019, Helmut Schmidt University, Hamburg.
    8. Beckmann, Klaus B., 2017. "Bounded rationality in differential games," Working Paper 178/2017, Helmut Schmidt University, Hamburg.
    9. Dewenter, Ralf & Linder, Melissa & Thomas, Tobias, 2018. "Can Media Drive the Electorate? The Impact of Media Coverage on Party Affiliation and Voting Intentions," Working Paper 179/2018, Helmut Schmidt University, Hamburg.
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    More about this item

    Keywords

    two-sided markets; indirect network effects; endogenous network effects; optimal investment strategy;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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