CFDP 1481

Network Markets and Consumer Coordination

Author(s): 

Publication Date: September 2004

Pages: 45

Abstract: 

This paper assumes that groups of consumers in network markets can coordinate their choices when it is in their best interest to do so, and when coordination does not require communication. It is shown that multiple asymmetric networks can coexist in equilibrium if consumers have heterogeneous reservation values. A monopolist provider might choose to operate multiple networks to price differentiate consumers on both sides of the market. Competing network providers might operate networks such that one of them targets high reservation value consumers on one side of the market, while the other targets high reservation value consumers on the other side. Firms can obtain positive profits in price competition. In these asymmetric equilibria product di.erentiation is endogenized by the network choices of consumers. Heterogeneity of consumers is necessary for the existence of this type of equilibrium.

Keywords: 

Two-sided markets, Network externalities, Platform competition, Optimal pricing, Price discrimination, Coordination, Coalitional agreements

JEL Classification Codes: D43, D62, L11, L14