Internet Exchange Formation and Competition When Potential Participants Can Coodinate

Jack A. Nickerson and Hideo Owan

No 111, Econometric Society 2004 North American Summer Meetings from Econometric Society

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 cooridination 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 (search for similar items in EconPapers)
JEL-codes: L14 (search for similar items in EconPapers)
Date: 2004-08-11
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ecm:nasm04:111

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