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TWO‐SIDED MARKETS WITH PECUNIARY AND PARTICIPATION EXTERNALITIES *
Author(s) -
REISINGER MARKUS,
RESSNER LUDWIG,
SCHMIDTKE RICHARD
Publication year - 2009
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/j.1467-6451.2009.00373.x
Subject(s) - externality , complement (music) , welfare , microeconomics , set (abstract data type) , economics , network effect , two sided market , free entry , strategic complements , service (business) , advertising , business , industrial organization , marketing , market economy , computer science , chemistry , biochemistry , phenotype , complementation , programming language , gene
The existing literature on two‐sided markets addresses participation externalities, but it has neglected pecuniary externalities between platforms. In this paper we build a model that incorporates both externalities. In our set‐up, differentiated platforms compete in advertising levels and offer consumers a service free of charge that is financed through advertising. We show that advertising can exhibit the properties of a strategic substitute or complement. Surprisingly, we find that platform profits can increase with market entry and that there are cases in which the level of advertising rises with entry. We also consider endogenous entry and provide a welfare analysis.