Price Competition in Two-Sided Markets with Heterogeneous Consumers and Network Effects

52 Pages Posted: 8 Oct 2013

See all articles by Lapo Filistrucchi

Lapo Filistrucchi

Tilburg University, TILEC; University of Florence, Dipartimento di Scienze Economiche

Tobias J. Klein

Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER); IZA Institute of Labor Economics; Netspar; Tilburg Law and Economics Center (TILEC)

Date Written: October 1, 2013

Abstract

We model a two-sided market with heterogeneous customers and two heterogeneous network effects. In our model, customers on each market side care differently about both the number and the type of customers on the other side. Examples of two-sided markets are online platforms or daily newspapers. In the latter case, for instance, readership demand depends on the amount and the type of advertisements. Also, advertising demand depends on the number of readers and the distribution of readers across demographic groups. There are feedback loops because advertising demand depends on the numbers of readers, which again depends on the amount of advertising, and so on. Due to the difficulty in dealing with such feedback loops when publishers set prices on both sides of the market, most of the literature has avoided models with Bertrand competition on both sides or has resorted to simplifying assumptions such as linear demands or the presence of only one network effect. We address this issue by first presenting intuitive sufficient conditions for demand on each side to be unique given prices on both sides. We then derive sufficient conditions for the existence and uniqueness of an equilibrium in prices. For merger analysis, or any other policy simulation in the context of competition policy, it is important that equilibria exist and are unique. Otherwise, one cannot predict prices or welfare effects after a merger or a policy change. The conditions are related to the own- and cross-price effects, as well as the strength of the own and cross network effects. We show that most functional forms used in empirical work, such as logit type demand functions, tend to satisfy these conditions for realistic values of the respective parameters. Finally, using data on the Dutch daily newspaper industry, we estimate a flexible model of demand which satisfies the above conditions and evaluate the effects of a hypothetical merger and study the effects of a shrinking market for offline newspapers.

Keywords: Two-sided markets, indirect network effects, merger simulation, equilibrium, competition policy, newspapers

JEL Classification: L13, L40, L82

Suggested Citation

Filistrucchi, Lapo and Klein, Tobias J., Price Competition in Two-Sided Markets with Heterogeneous Consumers and Network Effects (October 1, 2013). NET Institute Working Paper No. 13-20. Available at SSRN: https://ssrn.com/abstract=2336411 or http://dx.doi.org/10.2139/ssrn.2336411

Lapo Filistrucchi (Contact Author)

Tilburg University, TILEC ( email )

P.O. Box 90153
Tilburg, Noord-Brabant NL-5000 LE
Netherlands
+31 13 466 3360 (Phone)
+31 13 466 3042 (Fax)

HOME PAGE: http://www.lapofilistrucchi.com

University of Florence, Dipartimento di Scienze Economiche ( email )

via delle Pandette 9
Florence, Florence IT-50127
Italy
+39 055 2759579 (Phone)
+39 055 2759910 (Fax)

HOME PAGE: http://www.lapofilistrucchi.com

Tobias J. Klein

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands

HOME PAGE: http://center.uvt.nl/staff/klein/index.html

Tilburg University - Center for Economic Research (CentER)

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
223
rank
129,115
Abstract Views
819
PlumX Metrics