Competition in Two-sided Platform Markets with Direct Network Effect

Abstract

In light of recent trends in social networking services that encourage users of platforms to share, recommend, and do activities with others, this work analyzes platform competition in two-sided markets that exhibit direct (or within-) network effect in addition to conventional cross-network effect. Introduction of direct network effect to one group (buyer-side) in a two-sided market generates two counteracting effects: demand-augmenting effect and demand-sensitizing effect.

The former allows platforms to raise buyer-side price, thereby increasing the sum of prices charged to buyers and sellers, whereas the latter causes platforms to lower them. I show that demand-augmenting effect dominates demand-sensitizing effect under the monopoly platform, whereas introducing competition between platforms under sufficient direct network effect relatively strengthens the demandsensitizing effect, which lowers the price charged to buyers.