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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 29, No. 3, pp.331-377
ISSN: 1225-0279 (Print)
Print publication date 31 Aug 2016
Received 27 May 2015 Revised 09 Jun 2016 Accepted 11 Jul 2016

Competition in Two-sided Platform Markets with Direct Network Effect

Jungsik Hyun
Jungsik Hyun, Master’s Graduate of Seoul National University and Ph. D. student in Economics, Columbia University jh3632@columbia.edu

JEL Classification: D43, D85, L82, L86

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.

Keywords:

Two-sided markets, Platform competition, Social networking services, Network effects

Acknowledgments

This work is based on my Master’s thesis at Seoul National University. I am grateful to Professor In Ho Lee for his thoughtful guidance and suggestions. I also wish to thank Professor Jinwoo Kim and Professor Jihong Lee for their valuable comments. This work was supported by the Brain Korea 21 Program for Leading University & Students (BK 21 PLUS).

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