Inter-Group and Intra-Group Externalities of Two-Sided Markets in Electronic Commerce
ABSTRACT
The e-marketplaces, which play an important role in facilitating transactions and aggregating information in electronic commerce, show positive inter-group externalities where one group’s benefit from receiving a service depends on the number of the intermediary services consumed by the other group, and negative intra-group externalities where the surplus is destroyed because members within the group compete with each other. In this paper, with a different approach from the emerging two-sided markets theory and the traditional microeconomic theory, we analyze a monopolistic e-marketplace owned by a third-party firm by substituting the size of consumers with the number of intermediary services. Moreover, we pay close attention to solving the following problems: 1) When these inter- and intra-group externalities exist, are both the demand curves and the pricing strategies of intermediary services different from those of traditional goods? 2) How to price intermediary services to maximize profit in the e-marketplaces? 3) How do these network externalities affect the management strategy of platforms? Finally, we exemplify such analytical results as pricing strategies of platforms with managerial practice of electronic commerce.
The e-marketplaces, which play an important role in facilitating transactions and aggregating information in electronic commerce, show positive inter-group externalities where one group’s benefit from receiving a service depends on the number of the intermediary services consumed by the other group, and negative intra-group externalities where the surplus is destroyed because members within the group compete with each other. In this paper, with a different approach from the emerging two-sided markets theory and the traditional microeconomic theory, we analyze a monopolistic e-marketplace owned by a third-party firm by substituting the size of consumers with the number of intermediary services. Moreover, we pay close attention to solving the following problems: 1) When these inter- and intra-group externalities exist, are both the demand curves and the pricing strategies of intermediary services different from those of traditional goods? 2) How to price intermediary services to maximize profit in the e-marketplaces? 3) How do these network externalities affect the management strategy of platforms? Finally, we exemplify such analytical results as pricing strategies of platforms with managerial practice of electronic commerce.
Cite this paper
nullL. Li, Y. Chai and Y. Liu, "Inter-Group and Intra-Group Externalities of Two-Sided Markets in Electronic Commerce," Journal of Service Science and Management, Vol. 4 No. 1, 2011, pp. 52-58. doi: 10.4236/jssm.2011.41008.
nullL. Li, Y. Chai and Y. Liu, "Inter-Group and Intra-Group Externalities of Two-Sided Markets in Electronic Commerce," Journal of Service Science and Management, Vol. 4 No. 1, 2011, pp. 52-58. doi: 10.4236/jssm.2011.41008.
References
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[1] J. Rochet, and J. Tirole, “Two-Sided Markets: A Progress Report,” Rand Journal of Economics, Vol. 37, No. 3, 2006, pp. 645-667. doi:10.1111/j.1756-2171.2006.tb00036.x [2] D. S. Evans. “The Antitrust Economics of Multi-Sided Platform Markets,” Yale Journal on Regulation, Vol. 20, No. 2, 2003, pp. 325-381. [3] B. Caillaud and B. Jullien. “Chicken & Egg: Competition among Intermediation Service Providers,” Rand Journal of Economics, Vol. 34, No. 2, 2003, pp. 309-328. doi:10.2307/1593720 [4] J. Rochet and J. Tirole. “Platform Competition in Two-Sided Market,” Journal of the European Economic Association, Vol. 1, No. 4, 2003, pp. 990-1009. doi:10.1162/154247603322493212 [5] M. Armstrong. “Competition in Two-Sided Markets,” Rand Journal of Economics, Vol. 37, No. 3, 2006, pp. 668-691. doi:10.1111/j.1756-2171.2006.tb00037.x [6] M. Armstrong and J. Wrigh. “Two-Sided Markets, Competitive Bottlenecks and Exclusive Contracts,” Economic Theory, Vol. 32, 2007, pp. 353-380. doi:10.1007/s00199-006-0114-6 [7] M. L. Katz and C. Shapiro. “Network Externalities, Competition, and Compatibility,” American Economic Review, Vol. 75, No. 3, 1985, pp. 424-440. [8] J. Wrigh, “Optimal Card Payment Systems,” European Economic Review, Vol. 47, 2003, pp. 587-612. doi:10.1016/S0014-2921(02)00305-7 [9] J. Wrigh, “The Determinants of Optimal Interchange Fees in Payment Systems,” Journal of Industrial Economics, Vol. 55, 2004, pp. 1-26. doi:10.1111/j.0022-1821.2004.00214.x [10] G. G. Parker and M. W. Van Alstyne. “Two-Sided Network Effects: A Theory of Information Product Design,” Management Science, Vol. 51, No. 10, October 2005, pp. 1494-1504. doi:10.1287/mnsc.1050.0400 [11] A. Hagiu. “Pricing and Commitment by Two-Sided Platforms,” Rand Journal of Economics, Vol. 37, No. 3, 2006, pp. 720-737. doi:10.1111/j.1756-2171.2006.tb00039.x [12] M. Reisinger, L. Ressner and R. Schmidtke. “Two-Sided Markets with Pecuniary and Participation Externalities,” Journal of Industrial Economics, Vol. LVII, No. 1, March 2009, pp. 1-26. [13] B. Jullien. “Two-Sided Markets and Electronic Intermediaries,” CESifo Economic Studies, Vol. 51, No. 2-3, 2005, pp. 233-260. doi:10.1093/cesifo/51.2-3.233 [14] B. Yoo, V. Choudhary, and T. Mukhopadhyay, “A Model of Neutral B2B Intermediaries,”. Journal of Management Information Systems, Vol. 19, No. 3, pp. 1-12, 2002. [15] P. Belleflamme and E. Toulemonde. “Negative Intra- Group Externalities in Two-Sided Markets,” International Economic Review, Vol. 50, No. 1, February 2009, pp. 245-272. doi:10.1111/j.1468-2354.2008.00529.x [16] V. K. Rangan, “Free Markets online,” Harvard Case study 9-598-109, Harvard University, Cambridge, MA, February 1999.