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Two-sided competition, platform services and online shopping market structure

Yang Geng (), Yulin Zhang and Jing Li
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Yang Geng: Nanjing Forestry University
Yulin Zhang: Southeast University
Jing Li: Nanjing University of Science and Technology

Journal of Economics, 2023, vol. 138, issue 2, No 1, 95-127

Abstract: Abstract On an online shopping platform, for users on one side (buyers or sellers), the affiliation decisions depend not only on their stand-alone valuations for the platform’s services, but also on the platform’s user base on the other side. This paper investigates online shopping market structure based on platform services on the two sides and cross-group network effects. We find that the entry of inactive platforms hinges on the side where the strength gap between active platforms and inactive platforms is smaller, i.e. the side on which the average stand-alone valuation of users for platform services is relatively high. Specifically, given the sum of the average stand-alone valuations on the two sides, the market structure is more competitive when the proportion of the average stand-alone valuation on one side to the other is too high or too low. Furthermore, the market structure is more monopolistic when cross-group network effects are strong. We also find that social welfare and the total surplus of users on the two sides may both be lower when the market structure is more competitive. In a case where users on one side multi-home, we find that inactive platforms should pay attention to the average stand-alone valuation on the multi-homing side to enter the markets, whereas active platforms should pay attention to the average stand-alone valuation on the single-homing side to prevent the entry of inactive platforms.

Keywords: Market structure; Two-sided competition; Network effects; Multi-homing; D43; L13 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s00712-022-00803-w

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