Internet Exchange Formation and Competition When Potential Participants Can Coordinate

32 Pages Posted: 26 Jan 2004

See all articles by Hideo Owan

Hideo Owan

University of Tokyo

Jackson A. Nickerson

Washington University in St. Louis - John M. Olin Business School

Date Written: January 14, 2004

Abstract

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

Owan, Hideo and Nickerson, Jackson A., Internet Exchange Formation and Competition When Potential Participants Can Coordinate (January 14, 2004). Available at SSRN: https://ssrn.com/abstract=489625 or http://dx.doi.org/10.2139/ssrn.489625

Hideo Owan (Contact Author)

University of Tokyo ( email )

Hongo 7-3-1
Tokyo, TOKYO 113-0033
Japan

Jackson A. Nickerson

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6366 (Phone)
314-935-6359 (Fax)

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