Friday, April 9, 2010
Posted by D. Daniel Sokol
Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich), Markus Lang (Institute for Strategy and Business Economics, University of Zurich), and Panlang Lin (Institute for Strategy and Business Economics, University of Zurich) explain The Role of Negative Intra-Side Externalities in Two-Sided Markets.
ABSTRACT: This paper presents a theoretical model of two-sided markets with both positive inter-side externalities and negative intra-side externalities. It analyzes the net impact of negative intra-side externalities on platform prices, demands and profits in three scenarios: (i) monopoly platforms, (ii) competing platforms with two-sided single-homing, and (iii) competitive bottlenecks. The paper shows that a monopoly platform will produce lower equilibrium profits in the presence of negative intra-side externalities. By contrast, competing platforms with two-sided single-homing enjoy a higher equilibrium profit, whereas the net impact of negative intra-side externalities on the equilibrium profit of competing platforms with one-sided multi-homing (competitive bottlenecks) remains ambiguous. Based on the analysis, we derive implications for platform owners on how to manage negative intra-side externalities.