Competing for Contacts: Network Competition, Trade Intermediation and Fragmented Duopoly
A two-sided, pair-wise matching model is developed to analyse the strategic interaction between two information intermediaries who compete in commission rates and network size, giving rise to a fragmented duopoly market structure. The model suggests that network competition between information intermediaries has a distinctive market structure, where intermediaries are monopolist service providers to some contacts but duopolists over contacts they share in their network overlap. The intermediaries` inability to price discriminate between the competitive and non-competitive market segments, gives rise to an undercutting game, which has no pure strategy Nash equilibrium. The incentive to randomise commission rates yields a mixed strategy Nash equilibrium. Finally, competition is affected by the technology of network development. The analysis shows that either a monopoly or a fragmented duopoly can prevail in equilibrium, depending on the network-building technology. Under convexity assumptions, both intermediaries invest in a network and compete over common matches, while randomising commission rates. In contrast, linear network development costs can only give rise to a monopolistic outcome.
|Date of creation:||01 Nov 2007|
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- Michael R. Baye & Casper G. De Vries, 1992. "Mixed Strategy Trade Equilibria," Canadian Journal of Economics, Canadian Economics Association, vol. 25(2), pages 281-93, May.
- T. Randolph Beard & George S. Ford & R. Carter Hill, 2005. "Fragmented Duopoly: A Conceptual and Empirical Investigation," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2377-2396, November.
- Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
- Caillaud, Bernard & Jullien, Bruno, 2001. "Competing cybermediaries," European Economic Review, Elsevier, vol. 45(4-6), pages 797-808, May.
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