Product Differentiation on a Platform: The Informative and Persuasive Role of Advertising

CES Discussion Paper No. 10.03

35 Pages Posted: 12 Feb 2010

Date Written: January 30, 2010

Abstract

Both sides of a two-sided market are usually modeled as markets without product differentiation. Often however, it will be profit maximizing to differentiate one or two sides in two or more types. In a simple theoretical model, inspired by Yellow Pages, we show that this decision crucially depends on the appreciation of these differentiated types by the other side. We argue that this consists of two parts: first, a preference for informative advertisement by users and second, the effect of persuasive advertisements on users. The relation between both effects drives the monopolist decision to engage in product differentiation.

We test this conceptual framework in an empirical investigation of Yellow Pages. We find that Yellow Pages publishers offer large ads even though users don't value them at all. The economic rationale for this is that each advertisement type contributes directly (by the price paid for it) and indirectly (by increased usage) to revenues. Large ads are mainly set for this direct contribution, small ads for this indirect contribution. If a platform can choose the size, it will make the size difference between small and large ads as large as possible, in order to attract as much users as possible, but also to induce self selection among advertisers.

Keywords: two-sided markets, product differentiation, Yellow Pages, advertising

JEL Classification: D42, L12, L86

Suggested Citation

De Smet, Dries and Van Cayseele, Patrick G. J., Product Differentiation on a Platform: The Informative and Persuasive Role of Advertising (January 30, 2010). CES Discussion Paper No. 10.03, Available at SSRN: https://ssrn.com/abstract=1551187 or http://dx.doi.org/10.2139/ssrn.1551187

Dries De Smet (Contact Author)

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Patrick G. J. Van Cayseele

KU Leuven - Department of Economics ( email )

Leuven, B-3000
Belgium
+32-16-326830 (Phone)
+32-16-326796 (Fax)

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