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Asymmetric Network Effects

When platforms compete for consumers, two types of consumer heterogeneity will matter: consumers value the presence of other consumers on a platform differently, and consumers contribute to the value of the platform differently. The optimal discriminatory pricing policy for platforms will depend on whether those two dimensions of consumer heterogeneity are positively or negatively correlated, which is an empirical question. In a companion paper (Cantillon & Yin, 2008), we study membership decisions of trading firms for two competing exchanges: LIFFE and DTB. Our analysis shows that different traders care about liquidity differently. In this paper, we estimate the heterogeneous contribution to liquidity by different types. We combine the estimates from both papers of heterogeneous preferences and contributions to liquidity. We find that valuations of liquidity tend to be correlated with contributions to liquidity in this setting.

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File URL: http://www.netinst.org/Cantillon_Yin_08-42.pdf
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Paper provided by NET Institute in its series Working Papers with number 08-42.

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Length: 33 pages
Date of creation: Nov 2008
Date of revision:
Handle: RePEc:net:wpaper:0842
Contact details of provider: Web page: http://www.NETinst.org/

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  1. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February.
  2. Appelbaum, Elie, 1979. "On the Choice of Functional Forms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 449-58, June.
  3. Pollak, Robert A & Sickles, Robin C & Wales, Terence J, 1984. "The CES-Translog: Specification and Estimation of a New Cost Function," The Review of Economics and Statistics, MIT Press, vol. 66(4), pages 602-07, November.
  4. Z, Griliches & Jacques Mairesse, 1997. "Production Functions : The Search for Identification," Working Papers 97-30, Centre de Recherche en Economie et Statistique.
  5. Jullien, Bruno, 2001. "Competing with Network Externalities and Price Discrimination," CEPR Discussion Papers 2883, C.E.P.R. Discussion Papers.
  6. Daniel A. Ackerberg & Gautam Gowrisankaran, 2006. "Quantifying Equilibrium Network Externalities in the ACH Banking Industry," NBER Working Papers 12488, National Bureau of Economic Research, Inc.
  7. Stephen Ryan & Catherine Tucker, 2006. "Heterogeneity and the Dynamics of Technology Adoption," Working Papers 06-26, NET Institute, revised Oct 2006.
  8. Greene, William H. & Hensher, David A., 2003. "A latent class model for discrete choice analysis: contrasts with mixed logit," Transportation Research Part B: Methodological, Elsevier, vol. 37(8), pages 681-698, September.
  9. Silber, William L, 1984. " Marketmaker Behavior in an Auction Market: An Analysis of Scalpers in Futures Markets," Journal of Finance, American Finance Association, vol. 39(4), pages 937-53, September.
  10. Berndt, Ernst R & Khaled, Mohammed S, 1979. "Parametric Productivity Measurement and Choice among Flexible Functional Forms," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1220-45, December.
  11. Gregory J. Kuserk & Peter R. Locke, 1993. "Scalper behavior in futures markets: An empirical examination," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(4), pages 409-431, 06.
  12. Caves, Douglas W & Christensen, Laurits R, 1980. "Global Properties of Flexible Functional Forms," American Economic Review, American Economic Association, vol. 70(3), pages 422-32, June.
  13. Peter R. Locke & Asani Sarkar, 2001. "Liquidity supply and volatility: futures market evidence," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(1), pages 1-17, 01.
  14. Catherine Tucker, 2008. "Identifying Formal and Informal Influence in Technology Adoption with Network Externalities," Management Science, INFORMS, vol. 54(12), pages 2024-2038, December.
  15. repec:rje:randje:v:37:y:2006:3:p:738-761 is not listed on IDEAS
  16. Gautam Gowrisankaran & Joanna Stavins, 2004. "Network Externalities and Technology Adoption: Lessons from Electronic Payments," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 260-276, Summer.
  17. Pagano, Marco, 1986. "Trading Volume and Asset Liquidity," CEPR Discussion Papers 142, C.E.P.R. Discussion Papers.
  18. Cantillon, Estelle & Yin, Pai-Ling, 2008. "Competition between Exchanges: Lessons from the Battle of the Bund," CEPR Discussion Papers 6923, C.E.P.R. Discussion Papers.
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