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Intermediation and investment incentives

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  • BELLEFLAMME, Paul
  • PEITZ, Martin

Abstract

We analyze whether and how the fact that products are not sold on free, public platforms but on competing for-profit platforms affects sellers? investment incentives. Investments in cost reduction, quality, or marketing measures are here the joint and coordinated efforts by sellers. We show that, in general, for-profit intermediation is not neutral to such investment incentives. As for-profit intermediaries reduce the rents that are available in the market, one might suspect that sellers have weaker investment incentives with competing for-profit platforms. However, this is not necessarily the case. The reason is that investment incentives affect the size of the network effects and thus competition between intermediaries. In particular, we show that whether for-profit intermediation raises or lowers investment incentives depends on which side of the market singlehomes.

Suggested Citation

  • BELLEFLAMME, Paul & PEITZ, Martin, 2006. "Intermediation and investment incentives," CORE Discussion Papers 2006094, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2006094
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    File URL: https://uclouvain.be/en/research-institutes/immaq/core/dp-2006.html
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    References listed on IDEAS

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    1. Kaiser, Ulrich & Wright, Julian, 2006. "Price structure in two-sided markets: Evidence from the magazine industry," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 1-28, January.
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    4. Mark Armstrong, 2006. "Competition in two‐sided markets," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 668-691, September.
    5. David Evans & Richard Schmalensee, 2007. "The Industrial Organization of Markets with Two-Sided Platforms," CPI Journal, Competition Policy International, vol. 3.
    6. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
    7. John Rust & George Hall, 2003. "Middlemen versus Market Makers: A Theory of Competitive Exchange," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 353-403, April.
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    9. 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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    11. repec:rus:hseeco:72158 is not listed on IDEAS
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    More about this item

    Keywords

    two-sided markets; network effects; intermediation; investment incentives;

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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