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Competition in two-sided markets with common network externalities

  • Bardey, David
  • Cremer, Helmuth
  • Lozachmeur, Jean-Marie

We study competition in two sided markets with common network externality rather than with the standard inter-group effects. This type of externality occurs when both groups benefit, possibly with different intensities, from an increase in the size of one group and from a decrease in the size of the other. We explain why common externality is relevant for the health and education sectors. We focus on the symmetric equilibrium and show that when the externality itself satisfies an homogeneity condition then platforms’ profits and price structure have some specific properties. Our results reveal how the rents coming from network externalities are shifted by platforms from one side to other, according to the homogeneity degree. In the specific but realistic case where the common network externality is homogeneous of degree zero, platform's profit do not depend on the intensity of the (common) network externality. This is in sharp contrast to conventional results stating that the presence of network externalities in a two-sided market structure increases the intensity of competition when the externality is positive (and decreases it when the externality is negative). Prices are affected but in such a way that platforms only transfer rents from consumers to providers.

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File URL: http://www.tse-fr.eu/images/doc/wp/pe/09-103.pdf
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Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 09-103.

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Date of creation: Oct 2009
Date of revision: Oct 2010
Publication status: Published in Review of Industrial Organization, vol.�44, juin 2014, p.�327-359.
Handle: RePEc:tse:wpaper:21963
Contact details of provider: Phone: (+33) 5 61 12 86 23
Web page: http://www.tse-fr.eu/

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  1. repec:rje:randje:v:37:y:2006:3:p:668-691 is not listed on IDEAS
  2. Alan B. Krueger, 2002. "Economic Considerations and Class Size," NBER Working Papers 8875, National Bureau of Economic Research, Inc.
  3. Card, David & Krueger, Alan B, 1992. "Does School Quality Matter? Returns to Education and the Characteristics of Public Schools in the United States," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 1-40, February.
  4. BELLEFLAMME, Paul & TOULEMONDE, Eric, 2007. "Negative intra-group externalities in two-sided markets," CORE Discussion Papers 2007039, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Mark Armstrong, 2005. "Competition in Two-Sided Markets," Industrial Organization 0505009, EconWPA.
  6. Ching-to Albert Ma, 1994. "Health Care Payment Systems: Cost and Quality Incentives," Papers 0047, Boston University - Industry Studies Programme.
  7. David Bardey & Jean-Charles Rochet, 2009. "Competition among health plans: a two-sided market approach," DOCUMENTOS DE TRABAJO 005217, UNIVERSIDAD DEL ROSARIO.
  8. Joshua D. Angrist & Victor Lavy, 1999. "Using Maimonides' Rule To Estimate The Effect Of Class Size On Scholastic Achievement," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 533-575, May.
  9. Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers dp409, Financial Markets Group.
  10. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  11. Gaynor, Martin & Pauly, Mark V, 1990. "Compensation and Productive Efficiency of Partnerships: Evidence from Medical Group Practice," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 544-73, June.
  12. Kurucu, Gokce, 2007. "Negative Network Externalities in Two-Sided Markets: A Competition Approach," MPRA Paper 9746, University Library of Munich, Germany.
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