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Nesting Vertical and Horizontal Differentiation in Two-Sided Markets

  • Vitor Miguel Ribeiro

    ()

    (CEF.UP and Faculdade de Economia do Porto)

  • João Correia-da-Silva

    ()

    (CEF.UP and Faculdade de Economia do Porto)

  • Joana Resende

    ()

    (CEF.UP and Faculdade de Economia do Porto)

We develop a model that is a synthesis of the two-sided markets duopoly model of Armstrong (2006) with the nested vertical and horizontal di erentiation model of Gabszewicz and Wauthy (2012), which consists of a linear city with di erent consumer densities on the left and on the right side of the city. In equilibrium, the high-quality platform sells at a higher price and captures a greater market share than the low-quality platform, despite the indiff erent consumer being closer to the high-quality platform. The di fference between market shares is lower than socially optimal, because of the inter-group externality and because the high-quality platform sells at a higher price. We conclude that a perturbation that introduces a negligible di erence between the consumer density on the left and on the right side of the city may disrupt the existence of equilibrium in the model of Armstrong (2006). Finally, we show that inter-group externalities make it easier to deter an inferior-quality entrant and make it easier for a superior-quality entrant to conquer the market.

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Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 535.

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Length: 34 pages
Date of creation: May 2014
Date of revision:
Handle: RePEc:por:fepwps:535
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  1. IRMEN, Andreas & THISSE, Jacques-Francois, 1997. "Competition in multi-characteristics spaces: hotelling was almost right," CORE Discussion Papers 1997053, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. GABSZEWICZ, Jean J. & RESENDE, Joana, 2007. "Thematic clubs and the supremacy of network externalities," CORE Discussion Papers 2007073, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. GABSZEWICZ, Jean J. & WAUTHY, Xavier Yves, . "Nesting horizontal and vertical differentiation," CORE Discussion Papers RP -2460, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Joseph Farrell and Carl Shapiro., 1987. "Optimal Contracts with Lock-In," Economics Working Papers 8758, University of California at Berkeley.
  5. Rossella Argenziano, 2008. "Differentiated networks: equilibrium and efficiency," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 747-769.
  6. RESENDE, Joana, 2007. "The economic advantage of “being the voice of the majority”," CORE Discussion Papers 2007028, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Griva, Krina & Vettas, Nikolaos, 2011. "Price competition in a differentiated products duopoly under network effects," Information Economics and Policy, Elsevier, vol. 23(1), pages 85-97, March.
  8. Konstantinos Serfes & Eleftherios Zacharias, 2009. "Location Decisions of Competing Platforms," Working Papers 09-18, NET Institute, revised Aug 2009.
  9. António Brandão & João Correia-da-Silva & Joana Pinho, 2010. "Spatial competition between shopping centers," FEP Working Papers 394, Universidade do Porto, Faculdade de Economia do Porto.
  10. Economides, Nicholas, 1993. "Quality variations in the circular model of variety-differentiated products," Regional Science and Urban Economics, Elsevier, vol. 23(2), pages 235-257, April.
  11. Scotchmer, Suzanne, 1986. "Market share inertia with more than two firms : An existence problem," Economics Letters, Elsevier, vol. 21(1), pages 77-79.
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