Two-Sided Markets with Pecuniary and Participation Externalities

26 Pages Posted: 27 Apr 2009

See all articles by Markus Reisinger

Markus Reisinger

Frankfurt School of Finance & Management - Economics Department; CESifo (Center for Economic Studies and Ifo Institute)

Ludwig Ressner

affiliation not provided to SSRN

Richard Schmidtke

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics

Abstract

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.

Suggested Citation

Reisinger, Markus and Ressner, Ludwig and Schmidtke, Richard, Two-Sided Markets with Pecuniary and Participation Externalities. The Journal of Industrial Economics, Vol. 57, Issue 1, pp. 32-57, March 2009. Available at SSRN: https://ssrn.com/abstract=1378324 or http://dx.doi.org/10.1111/j.1467-6451.2009.00373.x

Markus Reisinger (Contact Author)

Frankfurt School of Finance & Management - Economics Department ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Ludwig Ressner

affiliation not provided to SSRN ( email )

Richard Schmidtke

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

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