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Two-Sided Markets with Pecuniary and Participation Externalities

Richard Schmidtke

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: The existing literature on "two-sided markets" addresses participation externalities, but so far it has neglected pecuniary externalities between competing platforms. In this paper we build a model that incorporates both externalities. In our setup differentiated platforms compete in advertising and offer consumers a service free of charge (such as a TV program) that is financed through advertising. We show that advertising can exhibit the properties of a strategic substitute or complement. Surprisingly, there exist cases in which platforms benefit from market entry. Moreover, we show that from a welfare point of view perfect competition is not always desirable.

Keywords: two-sided markets; broadcasting; advertising; market entry; digital television. (search for similar items in EconPapers)
JEL-codes: D43 L13 L82 (search for similar items in EconPapers)
Date: 2006-06
New Economics Papers: this item is included in nep-com, nep-mic, nep-mkt and nep-net
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