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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 bene fit, 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 satis es an homogeneity condition then platforms’ pro ts and price structure have some speci fic 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 specifi c but realistic case where the common network externality is homogeneous of degree zero, platform’s pro t 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.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 578.

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Date of creation: Oct 2009
Date of revision: Oct 2010
Publication status: Published in Review of Industrial Organization, vol.�44, juin 2014, p.�327-359.
Handle: RePEc:ide:wpaper:21322
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