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Ad-sponsored Business Models and Compatibility Incentives of Social Networks

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Abstract

This paper examines social networks' incentives to establish compatibility under fee and ad-sponsored business models. I analyze the competition between two social networks and show that compatibility is only possible when the two networks are ad-sponsored. I also find that even when both networks are ad-sponsored, a network with a significant installed-base advantage may choose not to be compatible when the cost from sharing the market outweighs the benefit from additional ad profits. Finally, compatibility also requires a significant number of single-homing users. The results are consistent with empirical observations of social networks and suggest that increased adoption of ad-sponsored business models may lead to many de-facto standards in high-technology industries.

Suggested Citation

  • Feng Zhu, 2008. "Ad-sponsored Business Models and Compatibility Incentives of Social Networks," Working Papers 08-20, NET Institute, revised Sep 2008.
  • Handle: RePEc:net:wpaper:0820
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    References listed on IDEAS

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    Cited by:

    1. Ramon Casadesus-Masanell & Feng Zhu, 2010. "Strategies to Fight Ad-Sponsored Rivals," Management Science, INFORMS, vol. 56(9), pages 1484-1499, September.

    More about this item

    Keywords

    Ad-sponsored; Compatibility; Social networks; Business models;

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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