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Platform competition and seller investment incentives

  • Belleflamme, Paul
  • Peitz, Martin

Many products and services are not sold on open platforms but on competing for-profit platforms, which charge buyers and sellers for access. What is the effect of for-profit intermediation on seller investment incentives? Since for-profit intermediaries reduce the available rents in the market, one might naively suspect that sellers have weaker investment incentives with competing for-profit platforms. However, we show that for-profit intermediation may lead to overinvestment when free access would lead to underinvestment because investment decisions affect the strength of indirect network effects and, thus, access prices. We characterize the effect of for-profit intermediation on investment incentives depending on the nature of the investment and on which side of the market singlehomes.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 54 (2010)
Issue (Month): 8 (November)
Pages: 1059-1076

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Handle: RePEc:eee:eecrev:v:54:y:2010:i:8:p:1059-1076
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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  1. Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers dp409, Financial Markets Group.
  2. Gehrig, Thomas, 1993. "Intermediation in Search Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(1), pages 97-120, Spring.
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  8. Bester, H. & Petrakis, E., 1991. "The Incentives for Cost Reduction in a Differentiated Industry," Papers 9136, Tilburg - Center for Economic Research.
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  10. Nocke, Volker & Peitz, Martin & Stahl, Konrad, 2004. "Platform Ownership," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 16, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  11. Mark Armstrong & Julian Wright, 2007. "Two-sided Markets, Competitive Bottlenecks and Exclusive Contracts," Economic Theory, Springer, vol. 32(2), pages 353-380, August.
  12. Kaiser, Ulrich & Wright, Julian, 2004. "Price Structure in Two-sided Markets: Evidence from the Magazine Industry?," ZEW Discussion Papers 04-80, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  13. John Rust & George Hall, 2002. "Middlemen versus Market Makers: A Theory of Competitive Exchange," NBER Working Papers 8883, National Bureau of Economic Research, Inc.
  14. Yi, Sang-Seung, 1999. "Market structure and incentives to innovate: the case of Cournot oligopoly," Economics Letters, Elsevier, vol. 65(3), pages 379-388, December.
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