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

Author

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  • Akihiro NAKAMURA
  • Takanori IDA

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.

Suggested Citation

  • Akihiro NAKAMURA & Takanori IDA, 2021. "Delineating zero-price markets with network effects:An analysis of free messenger services," Discussion papers e-21-002, Graduate School of Economics , Kyoto University.
    • Handle: RePEc:kue:epaper:e-21-002
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    References listed on IDEAS

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    More about this item

    Keywords

    Freemium services; Market definition; Competitive policy; Conjoint analysis;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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