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Competing for Contacts: Network Competition, Trade Intermediation and Fragmented Duopoly

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  • Dimitra Petropoulou

Abstract

A two-sided, pair-wise matching model is developed to analyse the strategic interaction between two information intermediaries who compete in commission rates and network size, giving rise to a fragmented duopoly market structure. The model suggests that network competition between information intermediaries has a distinctive market structure, where intermediaries are monopolist service providers to some contacts but duopolists over contacts they share in their network overlap. The intermediaries` inability to price discriminate between the competitive and non-competitive market segments, gives rise to an undercutting game, which has no pure strategy Nash equilibrium. The incentive to randomise commission rates yields a mixed strategy Nash equilibrium. Finally, competition is affected by the technology of network development. The analysis shows that either a monopoly or a fragmented duopoly can prevail in equilibrium, depending on the network-building technology. Under convexity assumptions, both intermediaries invest in a network and compete over common matches, while randomising commission rates. In contrast, linear network development costs can only give rise to a monopolistic outcome.

Suggested Citation

  • Dimitra Petropoulou, 2007. "Competing for Contacts: Network Competition, Trade Intermediation and Fragmented Duopoly," Economics Series Working Papers 371, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:371
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    References listed on IDEAS

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    1. 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.
    2. Caillaud, Bernard & Jullien, Bruno, 2001. "Competing cybermediaries," European Economic Review, Elsevier, vol. 45(4-6), pages 797-808, May.
    3. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    4. T. Randolph Beard & George S. Ford & R. Carter Hill, 2005. "Fragmented Duopoly: A Conceptual and Empirical Investigation," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2377-2396, November.
    5. Michael R. Baye & Casper G. De Vries, 1992. "Mixed Strategy Trade Equilibria," Canadian Journal of Economics, Canadian Economics Association, vol. 25(2), pages 281-293, May.
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    Cited by:

    1. Gabriel Felbermayr & Benjamin Jung, 2011. "Trade Intermediation and the Organization of Exporters," Review of International Economics, Wiley Blackwell, vol. 19(4), pages 634-648, September.

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    More about this item

    Keywords

    International Trade; Pairwise Matching; Information Cost; Intermediation; Networks;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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