Intermediation and Investment Incentives
CORE and Louvain School of Management, UCL (Université Catholique de Louvain); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
University of Mannheim - Department of Economics
February 1, 2008
CORE Discussion Paper No. 2006/94
Many products and services are not sold on open platforms but on competing for-profit platforms, which charge buyers and sellers for access. What is the effect of for-profit intermediation on seller investment incentives? Investments in cost reduction, quality, or marketing measures are here the joint and coordinated efforts by sellers. As forprofit intermediaries reduce the rents that are available in the market, one might naively suspect that sellers have weaker investment incentives with competing for-profit platforms. However, we show that for-profit intermediation may lead to overinvestment when free access would lead to underinvestment because investment decisions affect the strength of indirect network effects and thus access prices. We characterize the effect of for-profit intermediation on investment incentives depending on the nature of the investment and on which side of the market singlehomes. Our analysis generalizes to non-coordinated seller investments.
Number of Pages in PDF File: 40
Keywords: Two-sided markets, Network effects, Intermediation, Investment incentives
JEL Classification: L10, D40working papers series
Date posted: December 11, 2006 ; Last revised: April 10, 2008
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