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Platform interconnection and quality incentives

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  • Salim, Claudia
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    Abstract

    We analyze competition between two platforms with positive network externalities. Platforms can choose to interconnect or alternatively, operate exclusively. We examine how this decision will affect pricing behaviour and incentives to invest in Platform quality. We find that interconnection is aa means to reduce externalities one side exerts on the other. It changes the mode of competition for subscribers and resultsin higher subscription prices. Further, even though interconnection allows for quaality spillovers to the rival platform, it results in higher quality investment than the case of exclusive platforms. Coordination will facilitate collusion on the lowest quality levels possible if its provision is costly. For low quality costs it will lead to asymmetric networks. Therefore, interconnection without coordinated investment activities is welfare maximising. --

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    Bibliographic Info

    Paper provided by Free University Berlin, School of Business & Economics in its series Discussion Papers with number 2008/16.

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    Date of creation: 2008
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    Handle: RePEc:zbw:fubsbe:200816

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    Related research

    Keywords: Two-sided markets; interconnection; investment in transaction quality;

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    1. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 152, Institut d'Économie Industrielle (IDEI), Toulouse.
    2. Schiff, Aaron, 2003. "Open and closed systems of two-sided networks," Information Economics and Policy, Elsevier, Elsevier, vol. 15(4), pages 425-442, December.
    3. Anette Boom & Pio Baake, . "Vertical Product Differentiation, Network Externalities, and Compatibility Decisions," Papers, Departmental Working Papers 010, Departmental Working Papers.
    4. Distaso, Walter & Lupi, Paolo & Manenti, Fabio M., 2006. "Platform competition and broadband uptake: Theory and empirical evidence from the European union," Information Economics and Policy, Elsevier, Elsevier, vol. 18(1), pages 87-106, March.
    5. Mark Armstrong & Julian Wright, 2007. "Two-sided Markets, Competitive Bottlenecks and Exclusive Contracts," Economic Theory, Springer, Springer, vol. 32(2), pages 353-380, August.
    6. Foros, Oystein & Hansen, Bjorn, 2001. "Competition and compatibility among Internet Service Providers," Information Economics and Policy, Elsevier, Elsevier, vol. 13(4), pages 411-425, December.
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