Network Effects and Two-Sided Markets

Posted by D. Daniel Sokol

As I think about how I am going to teach payment systems in the spring, I am particularly interested in how to think about the antitrust implications of two sided markets.  Adding to the literature is Cento Veljanovski of Case Associates.  Veljanovski prepared his paper Network Effects and Two-Sided Markets as part of his teaching in the Kings College, University of London Postgraduate Diploma/Masters in Economics in Competition Law.

ABSTRACT: This paper sets out the basic economics of network effects and two-sided or multi-sided markets as relevant to antitrust and regulation. Network effects, and the related concept of two- (or multi-) sided markets, are playing an increasing role in antitrust/competition law in the communications sector, computer hardware and software, Computer Ticketing Services (CRS), Automated Teller Machines (ATMs) and credit card schemes sectors to name a few; and also in the evaluation of mergers, industry standards, market structure and competitive behaviour. The discussion begins by defining network effects and the way they alter the economics of market structure, competitive behaviour and pricing. The theory is then applied to concerns over the adoption of industry and product standards, mergers in the communications sector, and the pricing of mobile services. This is followed by an introduction to the theory of two-sided markets. This covers situations where network effects affect consumers in different groups or sides of the market brought together by a third party, such as credit card schemes. The theory of two-sided markets is developed and then applied to some features of credit card schemes. This paper is a module for the Kings College, University of London Postgraduate Diploma/Masters in Economics in Competition Law, 2006/2007.