Intermediation and Investment Incentives

CORE Discussion Paper No. 2006/94

40 Pages Posted: 11 Dec 2006 Last revised: 10 Apr 2008

See all articles by Paul Belleflamme

Paul Belleflamme

CORE and Louvain School of Management, UCL (Université Catholique de Louvain); CESifo (Center for Economic Studies and Ifo Institute)

Martin Peitz

University of Mannheim - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2008

Abstract

Many products and services are not sold on open platforms but on competing for-profit platforms, which charge buyers and sellers for access. What is the effect of for-profit intermediation on seller investment incentives? Investments in cost reduction, quality, or marketing measures are here the joint and coordinated efforts by sellers. As forprofit intermediaries reduce the rents that are available in the market, one might naively suspect that sellers have weaker investment incentives with competing for-profit platforms. However, we show that for-profit intermediation may lead to overinvestment when free access would lead to underinvestment because investment decisions affect the strength of indirect network effects and thus access prices. We characterize the effect of for-profit intermediation on investment incentives depending on the nature of the investment and on which side of the market singlehomes. Our analysis generalizes to non-coordinated seller investments.

Keywords: Two-sided markets, Network effects, Intermediation, Investment incentives

JEL Classification: L10, D40

Suggested Citation

Belleflamme, Paul and Peitz, Martin, Intermediation and Investment Incentives (February 1, 2008). CORE Discussion Paper No. 2006/94. Available at SSRN: https://ssrn.com/abstract=949719 or http://dx.doi.org/10.2139/ssrn.949719

Paul Belleflamme (Contact Author)

CORE and Louvain School of Management, UCL (Université Catholique de Louvain) ( email )

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HOME PAGE: http://perso.uclouvain.be/paul.belleflamme/Site/Home.html

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

Martin Peitz

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany
+49 621 181-1835 (Phone)

HOME PAGE: http://peitz.vwl.uni-mannheim.de/

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