Competing for Contacts: Network Competition, Trade Intermediation and Fragmented Duopoly
A two-sided, pair-wise matching model is developed to analyse the strategic interaction between two information intermediaries who compete in commission rates and network size, giving rise to a fragmented duopoly market structure. The model suggests that network competition between information intermediaries has a distinctive market structure, where intermediaries are monopolistic service providers to some contacts but duopolists over contacts they share in their network overlap. the intermediaries' inability to price discriminate between the competitive and non-competitive market segments, gives rise to an undercutting game, which has no pure strategy Nash equilibrium. The incentive to randomise commission rates yields a mixed strategy Nash equilibrium. Finally, competition is affected by the technology of network development. The analysis shows that either a monopoly or a fragmented duopoly can prevail in equilibrium, depending on the network-building technology. Under convexity assumptions, both intermediaries invest in a network and compete over common matches, while randomising commission rates. In contrast, linear network development costs can only give rise to a monopolistic outcome.
|Date of creation:||Feb 2008|
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- Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
- Michael R. Baye & Casper G. De Vries, 1992. "Mixed Strategy Trade Equilibria," Canadian Journal of Economics, Canadian Economics Association, vol. 25(2), pages 281-93, May.
- T. Randolph Beard & George S. Ford & R. Carter Hill, 2005. "Fragmented Duopoly: A Conceptual and Empirical Investigation," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2377-2396, November.
- Caillaud, Bernard & Jullien, Bruno, 2001. "Competing cybermediaries," European Economic Review, Elsevier, vol. 45(4-6), pages 797-808, May.
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