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Search Diversion and Platform Competition

  • Hagiu, Andrei
  • Jullien, Bruno

Platforms use search diversion in order to trade off total consumer traffic for higher revenues derived by exposing consumers to unsolicited products (e.g. advertising). We show that the entry of a platform competitor leads to higher (lower) equilibrium levels of search diversion relative to a monopoly platform when the degree of horizontal differentiation between platforms is intermediate (low). On the other hand, more intense competition between active platforms (i.e. less differentiation) leads to less search diversion. When platforms charge consumers fixed access fees, all equilibrium levels of search diversion under platform competition are equal to the monopoly level, irrespective of the nature of competition. Furthermore, platforms that charge positive (negative) access fees to consumers have weaker (stronger) incentives to divert search relative to platforms that cannot charge such fees. Finally, endogenous affiliation on both sides (consumers and advertising) leads to stronger incentives to divert search relative to the one-sided exogenous affiliation (vertical integration) benchmark, whenever the marginal advertiser derives higher profits per consumer exposure relative to the average advertiser.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 795.

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Date of creation: Sep 2013
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Publication status: Published in International Journal of Industrial Organization, vol.�33, mars 2014, p.�48-60.
Handle: RePEc:ide:wpaper:27581
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  1. Claude Crampes & Carole Haritchabalet & Bruno Jullien, 2005. "Advertising, Competition and Entry in Media Industries," CESifo Working Paper Series 1591, CESifo Group Munich.
  2. GABSZEWICZ, Jean J. & LAUSSEL, Didier & SONNAC, Nathalie, . "Competition in the media and advertising markets," CORE Discussion Papers RP 1872, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. E. Glen Weyl, 2010. "A Price Theory of Multi-sided Platforms," American Economic Review, American Economic Association, vol. 100(4), pages 1642-72, September.
  4. Caillaud, Bernard & Jullien, Bruno, 2003. " Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-28, Summer.
  5. Susan Athey & Emilio Calvano & Joshua S. Gans, 2014. "The Impact of the Internet on Advertising Markets for News Media," CSEF Working Papers 379, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  6. Peitz, Martin & Valletti, Tommaso M., 2008. "Content and advertising in the media: Pay-tv versus free-to-air," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 949-965, July.
  7. Andrei Hagiu & Bruno Jullien, 2011. "Why do intermediaries divert search?," RAND Journal of Economics, RAND Corporation, vol. 42(2), pages 337-362, 06.
  8. Simon P. Anderson & Stephen Coate, 2003. "Market Provision of Broadcasting: A Welfare Analysis," Virginia Economics Online Papers 358, University of Virginia, Department of Economics.
  9. Susan Athey & Joshua S. Gans, 2010. "The Impact of Targeting Technology on Advertising Markets and Media Competition," American Economic Review, American Economic Association, vol. 100(2), pages 608-13, May.
  10. Kevin Boudreau, 2010. "Open Platform Strategies and Innovation: Granting Access vs. Devolving Control," Management Science, INFORMS, vol. 56(10), pages 1849-1872, October.
  11. Ramon Casadesus-Masanell & Feng Zhu, 2010. "Strategies to Fight Ad-Sponsored Rivals," Management Science, INFORMS, vol. 56(9), pages 1484-1499, September.
  12. Geoffrey G. Parker & Marshall W. Van Alstyne, 2005. "Two-Sided Network Effects: A Theory of Information Product Design," Management Science, INFORMS, vol. 51(10), pages 1494-1504, October.
  13. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
  14. David Evans & Richard Schmalensee, 2007. "The Industrial Organization of Markets with Two-Sided Platforms," CPI Journal, Competition Policy International, vol. 3.
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