Internet Exchange Formation and Competition When Potential Participants Can Coordinate
32 Pages Posted: 26 Jan 2004
Date Written: January 14, 2004
We analyze the formation and competition of market intermediaries when there are positive participation externalities between the two sides of the market; negative participation externalities within the same side; competition with traditional market; and implicit coordination among potential participants. The impact of implicit coordination is studied in two ways. First, we develop both static models - which are appropriate when the number of potential participants is large - and dynamic models - which are appropriate when a limited number of participants observe each other's choices. Potential participants can better coordinate their decisions in the dynamic participation process. Second, we assume that participation decisions are coordinated by a pessimistic belief about formation or entry of a new intermediary. In order to overcome the pessimism, the owner of an intermediary has to offer a fee schedule that implements her preferred outcome as the unique (subgame-perfect) Nash equilibrium outcome. The theory explains when and in which direction cross-subsidization strategies appear and when the incumbent intermediary can deter entry profitably.
Keywords: Internet intermediaries, externalities, implicit coordination, unique implementation
JEL Classification: D4, L1
Suggested Citation: Suggested Citation