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Platform interconnection and quality incentives


  • Salim, Claudia


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.

Suggested Citation

  • Salim, Claudia, 2008. "Platform interconnection and quality incentives," Discussion Papers 2008/16, Free University Berlin, School of Business & Economics.
  • Handle: RePEc:zbw:fubsbe:200816

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    References listed on IDEAS

    1. Mark Armstrong, 2006. "Competition in two‐sided markets," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 668-691, September.
    2. Baake, Pio & Boom, Anette, 2001. "Vertical product differentiation, network externalities, and compatibility decisions," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 267-284, January.
    3. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
    4. Foros, Oystein & Hansen, Bjorn, 2001. "Competition and compatibility among Internet Service Providers," Information Economics and Policy, Elsevier, vol. 13(4), pages 411-425, December.
    5. Mark Armstrong & Julian Wright, 2007. "Two-sided Markets, Competitive Bottlenecks and Exclusive Contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 32(2), pages 353-380, August.
    6. Distaso, Walter & Lupi, Paolo & Manenti, Fabio M., 2006. "Platform competition and broadband uptake: Theory and empirical evidence from the European union," Information Economics and Policy, Elsevier, vol. 18(1), pages 87-106, March.
    7. Schiff, Aaron, 2003. "Open and closed systems of two-sided networks," Information Economics and Policy, Elsevier, vol. 15(4), pages 425-442, December.
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    More about this item


    Two-sided markets; interconnection; investment in transaction quality;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets


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