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Price Competition in Two-Sided Markets with Heterogeneous Consumers and Network Effects

  • Lapo Filistrucchi

    ()

    (CentER, TILEC, Tilburg University and Department of Economics, University of Florence)

  • Tobias J. Klein

    ()

    (CentER, TILEC, Tilburg University)

We model a two-sided market with heterogeneous customers and two heterogeneous network effects. In our model, customers on each market side care differently about both the number and the type of customers on the other side. Examples of two-sided markets are online platforms or daily newspapers. In the latter case, for instance, readership demand depends on the amount and the type of advertisements. Also, advertising demand depends on the number of readers and the distribution of readers across demographic groups. There are feedback loops because advertising demand depends on the numbers of readers, which again depends on the amount of advertising, and so on. Due to the difficulty in dealing with such feedback loops when publishers set prices on both sides of the market, most of the literature has avoided models with Bertrand competition on both sides or has resorted to simplifying assumptions such as linear demands or the presence of only one network effect. We address this issue by first presenting intuitive sufficient conditions for demand on each side to be unique given prices on both sides. We then derive sufficient conditions for the existence and uniqueness of an equilibrium in prices. For merger analysis, or any other policy simulation in the context of competition policy, it is important that equilibria exist and are unique. Otherwise, one cannot predict prices or welfare effects after a merger or a policy change. The conditions are related to the own- and cross-price effects, as well as the strength of the own and cross network effects. We show that most functional forms used in empirical work, such as logit type demand functions, tend to satisfy these conditions for realistic values of the respective parameters. Finally, using data on the Dutch daily newspaper industry, we estimate a flexible model of demand which satisfies the above conditions and evaluate the effects of a hypothetical merger and study the effects of a shrinking market for offline newspapers.

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Paper provided by NET Institute in its series Working Papers with number 13-20.

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Length: 51 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:net:wpaper:1320
Contact details of provider: Web page: http://www.NETinst.org/

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  1. Daniel McFadden, 1987. "A Method of Simulated Moments for Estimation of Discrete Response Models Without Numerical Integration," Working papers 464, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Steven Berry & James Levinsohn & Ariel Pakes, 1998. "Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market," NBER Working Papers 6481, National Bureau of Economic Research, Inc.
  3. Filistrucchi, L. & Klein, T.J. & Michielsen, T.O., 2011. "Assessing Unilateral Merger Effects in a Two-Sided Market : An Application to the Dutch Daily Newspaper Market," Discussion Paper 2011-114, Tilburg University, Center for Economic Research.
  4. Oliver Budzinski & Isabel Ruhmer, 2008. "Merger Simulation in Competition Policy: A Survey," MAGKS Papers on Economics 200807, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
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  9. Affeldt, P. & Filistrucchi, L. & Klein, T.J., 2012. "Upward Pricing Pressure in Two-Sided Markets," Discussion Paper 2012-029, Tilburg University, Tilburg Law and Economic Center.
  10. repec:dgr:kubtil:2012029 is not listed on IDEAS
  11. Qihong Liu & Konstantinos Serfes, 2007. "Price Discrimination in Two-Sided Markets," Working Papers 07-25, NET Institute, revised Sep 2007.
  12. Kenneth Train, 2003. "Discrete Choice Methods with Simulation," Online economics textbooks, SUNY-Oswego, Department of Economics, number emetr2, March.
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  14. E. Glen Weyl, 2010. "A Price Theory of Multi-sided Platforms," American Economic Review, American Economic Association, vol. 100(4), pages 1642-72, September.
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  17. Filistrucchi, L. & Geradin, D.A.A.G. & van Damme, E.E.C., 2012. "Identifying Two-Sided Markets," Discussion Paper 2012-008, Tilburg University, Tilburg Law and Economic Center.
  18. Magnus, Jan R., 2010. "On the concept of matrix derivative," Journal of Multivariate Analysis, Elsevier, vol. 101(9), pages 2200-2206, October.
  19. Chandra, Ambarish & Collard-Wexler, Allan, 2008. "Mergers in Two-Sided Markets: An Application to the Canadian Newspaper Industry," MPRA Paper 7954, University Library of Munich, Germany.
  20. Elena Argentesi & Lapo Filistrucchi, 2007. "Estimating market power in a two-sided market: The case of newspapers," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(7), pages 1247-1266.
  21. Reynaert, Mathias & Verboven, Frank, 2014. "Improving the performance of random coefficients demand models: The role of optimal instruments," Journal of Econometrics, Elsevier, vol. 179(1), pages 83-98.
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