Two-Sided Markets with Pecuniary and Participation Externalities

Schmidtke, Richard (June 2006): Two-Sided Markets with Pecuniary and Participation Externalities. Discussion Papers in Economics 2006-19

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.

• Item Type: Paper
• Keywords: two-sided markets, broadcasting, advertising, market entry, digital television
• Faculties: Economics; Economics > Munich Discussion Papers in Economics; Economics > Munich Discussion Papers in Economics > Industrial Organization; Economics > Chairs > Seminar for Comparative Economics
• Subjects: 300 Social sciences > 300 Social sciences, sociology and anthropology; 300 Social sciences > 330 Economics
• JEL Classification: D43, L13, L82
• Language: English