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The Role of Negative Intra-Side Externalities in Two-Sided Markets

Author

Listed:
  • Helmut Dietl

    (Institute for Strategy and Business Economics, University of Zurich)

  • Markus Lang

    (Institute for Strategy and Business Economics, University of Zurich)

  • Panlang Lin

    (Institute for Strategy and Business Economics, University of Zurich)

Abstract

This paper presents a theoretical model of two-sided markets with both positive inter-side externalities and negative intra-side externalities. It analyzes the net impact of negative intra-side externalities on platform prices, demands and profits in three scenarios: (i) monopoly platforms, (ii) competing platforms with two-sided single-homing, and (iii) competitive bottlenecks. The paper shows that a monopoly platform will produce lower equilibrium profits in the presence of negative intra-side externalities. By contrast, competing platforms with two-sided single-homing enjoy a higher equilibrium profit, whereas the net impact of negative intra-side externalities on the equilibrium profit of competing platforms with one-sided multi-homing (competitive bottlenecks) remains ambiguous. Based on the analysis, we derive implications for platform owners on how to manage negative intra-side externalities.

Suggested Citation

  • Helmut Dietl & Markus Lang & Panlang Lin, 2010. "The Role of Negative Intra-Side Externalities in Two-Sided Markets," Working Papers 0121, University of Zurich, Institute for Strategy and Business Economics (ISU).
    • Handle: RePEc:iso:wpaper:0121
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    More about this item

    Keywords

    Two-sided market; platform competition; network externalities;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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