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Competition in two-sided markets with common network externalities

  • Bardey, David
  • Cremer, Helmuth
  • Lozachmeur, Jean-Marie

We study competition in two sided markets with common network externality rather than with the standard inter-group effects. This type of externality occurs when both groups benefit, possibly with different intensities, from an increase in the size of one group and from a decrease in the size of the other. We explain why common externality is relevant for the health and education sectors. We focus on the symmetric equilibrium and show that when the externality itself satisfies an homogeneity condition then platforms'profits and price structure have some specific properties. Our results reveal how the rents coming from network externalities are shifted by platforms from one side to other, according to the homogeneity degree. In the specific but realistic case where the common network externality is homogeneous of degree zero, platforms'profit do not depend on the intensity of the (common) network externality. This is in sharp contrast to conventional results stating that the presence of network externalities in a two-sided market structure increases the intensity of competition when the externality is positive (and decreases it when the externality is negative). Prices are affected but in such a way that platforms only transfer rents from consumers to providers. Finally, we show that a transaction fee leads to a lower remuneration for providers than a flat salary scheme. This, in turn, results in a lower prices level so that profits are the same under both regimes.

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Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/5992.

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Date of creation: 2010
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Publication status: Published in Cahiers de la Chaire Santé, 2010
Handle: RePEc:dau:papers:123456789/5992
Contact details of provider: Web page: http://www.dauphine.fr/en/welcome.html

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  1. Wright Julian, 2004. "One-sided Logic in Two-sided Markets," Review of Network Economics, De Gruyter, vol. 3(1), pages 1-21, March.
  2. David Bardey & Jean-Charles Rochet, 2010. "Competition Among Health Plans: A Two-Sided Market Approach," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(2), pages 435-451, 06.
  3. David Card & Alan Krueger, 1990. "Does School Quality Matter? Returns to Education and the Characteristics of Public Schools in the United States," NBER Working Papers 3358, National Bureau of Economic Research, Inc.
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  5. Jean-Charles Rochet & Jean Tirole, 2003. "Platform Competition in Two-Sided Markets," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 990-1029, 06.
  6. Troy Quast & David E. M. Sappington & Elizabeth Shenkman, 2008. "Does the quality of care in Medicaid MCOs vary with the form of physician compensation?," Health Economics, John Wiley & Sons, Ltd., vol. 17(4), pages 545-550.
  7. Paul Belleflamme & Eric Toulemonde, 2009. "Negative Intra-Group Externalities In Two-Sided Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(1), pages 245-272, 02.
  8. Kurucu, Gokce, 2007. "Negative Network Externalities in Two-Sided Markets: A Competition Approach," MPRA Paper 9746, University Library of Munich, Germany.
  9. Bernard Fortin & Nicolas Jacquemet & Bruce Shearer, 2008. "Policy Analysis in the Health-Services Market: Accounting for Quality and Quantity," Cahiers de recherche 0807, CIRPEE.
  10. Mark Armstrong, 2005. "Competition in Two-Sided Markets," Industrial Organization 0505009, EconWPA.
  11. Ching-to Albert Ma, 1994. "Health Care Payment Systems: Cost and Quality Incentives," Papers 0047, Boston University - Industry Studies Programme.
  12. Joshua D. Angrist & Victor Lavy, 1999. "Using Maimonides' Rule To Estimate The Effect Of Class Size On Scholastic Achievement," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 533-575, May.
  13. Bernard FORTIN & Nicolas JACQUEMET & Bruce SHEARER, 2008. "Policy Analysis in Health-Services Market: Accounting for Quality and Quantity," Annales d'Economie et de Statistique, ENSAE, issue 91-92, pages 293-319.
  14. repec:rje:randje:v:37:y:2006:3:p:668-691 is not listed on IDEAS
  15. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  16. repec:hal:journl:halshs-00305309 is not listed on IDEAS
  17. Gaynor, Martin & Pauly, Mark V, 1990. "Compensation and Productive Efficiency of Partnerships: Evidence from Medical Group Practice," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 544-73, June.
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