Delineating zero-price markets with network effects:An analysis of free messenger services

Akihiro Nakamura and Takanori Ida

Discussion papers from Graduate School of Economics , Kyoto University

Abstract: Billions of users worldwide use digital zero-price services every day. This study proposes a market definition method for digital zero-price services, using the messenger service as an example. We employ the small but significant non-transitory increase in cost (SSNIC) test, which is an improved version of the small but significant non-transitory increase in price (SSNIP) test, and conduct conjoint analysis while considering the network effect, a characteristic of digital services. Our results show that the price elasticity of demand is 0.628 and the critical markup ratio is 1.492–1.542 when only the price effect is considered. When the direct network effect is considered, the price elasticity of demand is 1.728 and the critical markup ratio is 0.479–0.529. Furthermore, when considering a two-sided market with indirect network effects, the price elasticity of demand is 2.162 and the critical markup ratio is 0.363–0.413. Thus, the price elasticity of demand for free messenger services is higher when the network effects and two-sided markets are considered.

Keywords: Freemium services; Market definition; Competitive policy; Conjoint analysis (search for similar items in EconPapers)
JEL-codes: L13 L41 L52 L86 L96 (search for similar items in EconPapers)
Pages: 22
Date: 2021-07
New Economics Papers: this item is included in nep-com and nep-pay
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