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Ad-sponsored Business Models and Compatibility Incentives of Social Networks

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.

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Paper provided by NET Institute in its series Working Papers with number 08-20.

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Length: 24 pages
Date of creation: Sep 2008
Date of revision: Sep 2008
Handle: RePEc:net:wpaper:0820
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  1. Jean-Charles Rochet & Jean Triole, 2002. "Platform competition in two sided markets," LSE Research Online Documents on Economics 24929, London School of Economics and Political Science, LSE Library.
  2. Doyle, Chris, 1998. "Programming in a competitive broadcasting market: entry, welfare and regulation," Information Economics and Policy, Elsevier, vol. 10(1), pages 23-39, March.
  3. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  4. Jean J, Gabszewicz & Didier Laussel & Nathalie Sonnac, 2004. "Does Advertising Lower the Price of Newspapers to Consumers ? A Theoretical Appraisal," Working Papers 2004-40, Centre de Recherche en Economie et Statistique.
  5. GABSZEWICZ, Jean J. & LAUSSEL, Didier & SONNAC, Nathalie, . "Programming and advertising competition in the broadcasting industry," CORE Discussion Papers RP 1873, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Toker Doganoglu & Julian Wright, 2003. "Multihoming and compatibility," Departmental Working Papers wp0314, National University of Singapore, Department of Economics.
  7. Farrell, Joseph, 1989. "Converters, Compatibility, and the Control of Interfaces," Department of Economics, Working Paper Series qt8161p50b, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  8. Clements, Matthew T., 2004. "Direct and indirect network effects: are they equivalent?," International Journal of Industrial Organization, Elsevier, vol. 22(5), pages 633-645, May.
  9. Jean J. Gabszewicz & Didier Laussel & Nathalie Sonnac, 2006. "Competition In The Media And Advertising Markets," Manchester School, University of Manchester, vol. 74(1), pages 1-22, 01.
  10. Simon P. Anderson & Stephen Coate, 2005. "Market Provision of Broadcasting: A Welfare Analysis," Review of Economic Studies, Oxford University Press, vol. 72(4), pages 947-972.
  11. GABSZEWICZ, Jean J. & LAUSSEL, Didier & SONNAC, Nathalie, 2000. "TV-broadcasting competition and advertising," CORE Discussion Papers 2000006, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. Jiawei Chen & Ulrich Doraszelski & Joseph E. Harrington, Jr., 2009. "Avoiding market dominance: product compatibility in markets with network effects," RAND Journal of Economics, RAND Corporation, vol. 40(3), pages 455-485.
  13. Claude Crampes & Carole Haritchabalet & Bruno Jullien, 2005. "Advertising, Competition and Entry in Media Industries," CESifo Working Paper Series 1591, CESifo Group Munich.
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  16. Josh Lerner & Feng Zhu, 2005. "What is the Impact of Software Patent Shifts?: Evidence from Lotus v. Borland," NBER Working Papers 11168, National Bureau of Economic Research, Inc.
  17. Holden, Steinar, 1993. "Network or pay-per-view? : A welfare analysis," Economics Letters, Elsevier, vol. 43(1), pages 59-64.
  18. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
  19. Ulrich Kaiser, 2007. "Do Media Consumers Really Dislike Advertising? An Empirical Assessment of a Popular Assumption in Economic Theory," CIE Discussion Papers 2007-08, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  20. Economides, Nicholas & White, Lawrence J., 1994. "Networks and compatibility: Implications for antitrust," European Economic Review, Elsevier, vol. 38(3-4), pages 651-662, April.
  21. Joseph Farrell & Garth Saloner, 1984. "Standardization, Compatibility and Innovation," Working papers 345, Massachusetts Institute of Technology (MIT), Department of Economics.
  22. repec:tpr:qjecon:v:91:y:1977:i:1:p:103-26 is not listed on IDEAS
  23. Esther Gal-Or & Anthony Dukes, 2003. "Minimum Differentiation in Commercial Media Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(3), pages 291-325, 09.
  24. 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.
  25. 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.
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