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Nesting Vertical and Horizontal Differentiation in Two-Sided Markets

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Vitor Miguel Ribeiro & João Correia-da-Silva & Joana Resende, 2014. "Nesting Vertical and Horizontal Differentiation in Two-Sided Markets," FEP Working Papers 535, Universidade do Porto, Faculdade de Economia do Porto.
  • Handle: RePEc:por:fepwps:535
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    References listed on IDEAS

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    1. Konstantinos Serfes & Eleftherios Zacharias, 2009. "Location Decisions of Competing Platforms," Working Papers 09-18, NET Institute, revised Aug 2009.
    2. Farrell, Joseph & Shapiro, Carl, 1989. "Optimal Contracts with Lock-In," American Economic Review, American Economic Association, vol. 79(1), pages 51-68, March.
    3. Daughety, Andrew F. & Reinganum, Jennifer F., 2007. "Competition and confidentiality: Signaling quality in a duopoly when there is universal private information," Games and Economic Behavior, Elsevier, vol. 58(1), pages 94-120, January.
    4. 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.
    5. Scotchmer, Suzanne, 1986. "Market share inertia with more than two firms : An existence problem," Economics Letters, Elsevier, vol. 21(1), pages 77-79.
    6. Rabah Amir & Jean Gabszewicz & Joana Resende, 2014. "Thematic Clubs and the Supremacy of Network Externalities," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(5), pages 706-729, October.
    7. Joana Resende, 2008. "The Economic Advantage of Being the “Voice of the Majority”," Journal of Media Economics, Taylor & Francis Journals, vol. 21(3), pages 158-190.
    8. Brandão, António & Correia-da-Silva, João & Pinho, Joana, 2014. "Spatial competition between shopping centers," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 234-250.
    9. Rossella Argenziano, 2008. "Differentiated networks: equilibrium and efficiency," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 747-769.
    10. Irmen, Andreas & Thisse, Jacques-Francois, 1998. "Competition in Multi-characteristics Spaces: Hotelling Was Almost Right," Journal of Economic Theory, Elsevier, vol. 78(1), pages 76-102, January.
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    12. 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.
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    Cited by:

    1. Debora Di Gioacchino & Alina Verashchagina, 2017. "Mass media and attitudes to inequality," Working Papers 178, University of Rome La Sapienza, Department of Public Economics.
    2. Nestor Duch-Brown, 2017. "Quality discrimination in online multi-sided markets," JRC Working Papers on Digital Economy 2017-06, Joint Research Centre (Seville site).

    More about this item

    Keywords

    Two-sided markets; Horizontal differentiation; Vertical differentiation;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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