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Platform interconnection and quality incentives

  • Salim, Claudia
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    We analyze competition between two platforms with positive network externalities. Platforms can choose to interconnect or alternatively, operate exclusively. We examine how this decision will affect pricing behaviour and incentives to invest in Platform quality. We find that interconnection is aa means to reduce externalities one side exerts on the other. It changes the mode of competition for subscribers and resultsin higher subscription prices. Further, even though interconnection allows for quaality spillovers to the rival platform, it results in higher quality investment than the case of exclusive platforms. Coordination will facilitate collusion on the lowest quality levels possible if its provision is costly. For low quality costs it will lead to asymmetric networks. Therefore, interconnection without coordinated investment activities is welfare maximising.

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    Paper provided by Free University Berlin, School of Business & Economics in its series Discussion Papers with number 2008/16.

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    Date of creation: 2008
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    Handle: RePEc:zbw:fubsbe:200816
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    1. Schiff, Aaron, 2003. "Open and closed systems of two-sided networks," Information Economics and Policy, Elsevier, vol. 15(4), pages 425-442, December.
    2. Jean-Charles Rochet & Jean Triole, 2002. "Platform competition in two sided markets," LSE Research Online Documents on Economics 24929, London School of Economics and Political Science, LSE Library.
    3. Walter Distaso & Paolo Lupi & Fabio M. Manenti, 2005. "Platform Competition and Broadband Uptake: Theory and Empirical Evidence from the European Union," Industrial Organization 0504019, EconWPA.
    4. Anette Boom & Pio Baake, . "Vertical Product Differentiation, Network Externalities, and Compatibility Decisions," Papers 010, Departmental Working Papers.
    5. Foros, Oystein & Hansen, Bjorn, 2001. "Competition and compatibility among Internet Service Providers," Information Economics and Policy, Elsevier, vol. 13(4), pages 411-425, December.
    6. Mark Armstrong & Julian Wright, 2007. "Two-sided Markets, Competitive Bottlenecks and Exclusive Contracts," Economic Theory, Springer, vol. 32(2), pages 353-380, August.
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