Two–Sided Markets with Pecuniary and Participation Externalities
The existing literature on "two-sided markets" addresses partici- pation externalities, but so far it has neglected pecuniary externalities between competing platforms. In this paper we build a model that incorporates both externalities. In our setup di®erentiated platforms compete in advertising and o®er consumers a service free of charge (such as a TV program) that is ¯nanced through advertising. We show that advertising can exhibit the properties of a strategic substitute or complement. Surprisingly, there exist cases in which platforms bene¯t from market entry. Moreover, we show that from a welfare point of view perfect competition is not always desirable.
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