Endogenous Network Effects

Ralf Dewenter and Franziska Löw ()
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Franziska Löw: Helmut Schmidt University, Hamburg, Postal: Helmut-Schmidt-University Hamburg, Industrial Economics, Holstenhofweg 85, 22043 Hamburg

No 194/2022, Working Paper from Helmut Schmidt University, Hamburg

Abstract: In contrast to traditional business models, two-sided platforms internalize indirect network effects that exist between different groups of platform participants. The strength of the network effects has a decisive influence on the success of the platform and its market position. Markets with particularly strong network effects are also often characterized by a high degree of concentration. However, the strength of the network effects is not exogenously given but can be influenced by targeted investment. This paper analyses how platforms can affect network effects by investing in appropriate infrastructure, data, or artificial intelligence. We derive optimal quantities, prices, profits, and investments depending on different types of investments.

Keywords: two-sided markets; indirect network effects; endogenous network effects; optimal investment strategy (search for similar items in EconPapers)
JEL-codes: D21 D42 L10 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2022-08-09
New Economics Papers: this item is included in nep-com, nep-mic, nep-net, nep-pay, nep-reg and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:ris:vhsuwp:2022_194

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