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Zero Pricing Platform Competition

Shiva Shekhar

MPRA Paper from University Library of Munich, Germany

Abstract: This article studies competition between different types of ad-funded platforms attracting consumers with free services. Consumers often find advertisements a nuisance on such platforms. We study how under a competitive setting platforms balance the tension between attracting consumers and rent extraction from the advertising side. We propose a flexible yet simple model that studies competition between standard platforms and social media platforms (with same-side network effects). We find that an increase in either positive same-side network effects or an increase in consumer disutility from advertisements leads to a reduction in the number of ads on that platform. When competing platforms merge, consumer side network effects do not impact prices and the number of ads is higher. In a setting where consumers present a negative (congestion) externality on each other, competition fails to protect consumer welfare and behaves erratically. Finally, we present a few extensions and discuss some policy implications.

Keywords: Social media platforms; platforms; two-sided markets; same side network effects; cross side network effects; advertising. (search for similar items in EconPapers)
JEL-codes: K21 L13 L82 L86 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-com, nep-ind, nep-law, nep-mic, nep-net, nep-pay and nep-reg
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