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Two-Sided Markets with Pecuniary and Participation Externalities

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  • Richard Schmidtke

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.

Suggested Citation

  • Richard Schmidtke, 2006. "Two-Sided Markets with Pecuniary and Participation Externalities," CESifo Working Paper Series 1776, CESifo.
    • Handle: RePEc:ces:ceswps:_1776
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    References listed on IDEAS

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    1. Jonas Hackner & Sten Nyberg, 2008. "Advertising and Media Market Concentration," Journal of Media Economics, Taylor & Francis Journals, vol. 21(2), pages 79-96.
    2. Mark Armstrong, 2006. "Competition in two‐sided markets," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 668-691, September.
    3. Brendan M. Cunningham & Peter J. Alexander, 2004. "A Theory of Broadcast Media Concentration and Commercial Advertising," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(4), pages 557-575, October.
    4. Reisinger, Markus, 2004. "Two-Sided Markets with Negative Externalities," Discussion Papers in Economics 478, University of Munich, Department of Economics.
    5. Simon P. Anderson & Stephen Coate, 2000. "Market Provision of Public Goods: The Case of Broadcasting," NBER Working Papers 7513, National Bureau of Economic Research, Inc.
    6. Jean-Charles Rochet & Jean Tirole, 2003. "Platform Competition in Two-Sided Markets," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 990-1029, June.
    7. Caillaud, Bernard & Jullien, Bruno, 2003. "Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-328, Summer.
    8. Volker Nocke & Martin Peitz & Konrad Stahl, 2007. "Platform Ownership," Journal of the European Economic Association, MIT Press, vol. 5(6), pages 1130-1160, December.
    9. Jean J. Gabszewicz & Didier Laussel & Nathalie Sonnac, 2004. "Programming and Advertising Competition in the Broadcasting Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(4), pages 657-669, December.
    10. Peitz, Martin & Valletti, Tommaso M., 2008. "Content and advertising in the media: Pay-tv versus free-to-air," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 949-965, July.
    11. Simon P. Anderson, 2005. "Regulation of Television advertising," Virginia Economics Online Papers 363, University of Virginia, Department of Economics.
    12. Nilssen,T. & Sorgard,L., 2001. "The TV industry : advertising and programming," Memorandum 18/2001, Oslo University, Department of Economics.
    13. Kind, Hans Jarle & Nilssen, Tore & Sørgard, Lars, 2005. "Advertising on TV: Under- or Overprovision?," Memorandum 15/2005, Oslo University, Department of Economics.
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    Cited by:

    1. Heijdra, Ben J. & Ligthart, Jenny E., 2007. "Fiscal policy, monopolistic competition, and finite lives," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 325-359, January.
    2. Fiedler, Ingo C, 2010. "Antitrust in two-sided markets: Is competition always desirable?," Berkeley Olin Program in Law & Economics, Working Paper Series qt5dp3q033, Berkeley Olin Program in Law & Economics.

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    Keywords

    two-sided markets; broadcasting; advertising; market entry; digital television;
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