Zero Pricing Platform Competition

Shekhar, Shiva (2020): Zero Pricing Platform Competition.

Abstract

This article studies competition between different types of ad-funded platforms attracting consumers with free services. Consumers often find advertisements a nuisance on such platforms. We study how under a competitive setting platforms balance the tension between attracting consumers and rent extraction from the advertising side. We propose a flexible yet simple model that studies competition between standard platforms and social media platforms (with same-side network effects). We find that an increase in either positive same-side network effects or an increase in consumer disutility from advertisements leads to a reduction in the number of ads on that platform. When competing platforms merge, consumer side network effects do not impact prices and the number of ads is higher. In a setting where consumers present a negative (congestion) externality on each other, competition fails to protect consumer welfare and behaves erratically. Finally, we present a few extensions and discuss some policy implications.

• Item Type: MPRA Paper
• Language: English
• Keywords: Social media platforms, platforms, two-sided markets, same side network effects, cross side network effects, advertising.
• Subjects: K - Law and Economics > K2 - Regulation and Business Law > K21 - Antitrust Law; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; L - Industrial Organization > L8 - Industry Studies: Services > L82 - Entertainment ; Media; L - Industrial Organization > L8 - Industry Studies: Services > L86 - Information and Internet Services ; Computer Software

References

Ambrus, A., Calvano, E. & Reisinger, M. (2016), ‘Either or both competition: A" two-sided" theory of advertising with overlapping viewerships’, American Economic Journal: Microeconomics 8(3), 189–222.

Anderson, S. P., Foros, Ø. & Kind, H. J. (2018), ‘Competition for advertisers and for viewers in media markets’, The Economic Journal 128(608), 34–54.

Anderson, S. P. & Gabszewicz, J. J. (2006), ‘The media and advertising: a tale of two-sided markets’, Handbook of the Economics of Art and Culture 1, 567–614.

Anderson, S. P. & Jullien, B. (2015), The advertising-financed business model in two-sided media markets, in ‘Handbook of media economics’, Vol. 1, Elsevier, pp. 41–90.

Anderson, S. P. & Peitz, M. (2020), ‘Media see-saws: Winners and losers in platform markets’, Journal of Economic Theory p. 104990.

Angelini, F., Castellani, M. & Zirulia, L. (2019), ‘Seller competition and platform investment in two-sided markets’.

Argentesi, E., Buccirossi, P., Calvano, E., Duso, T., Marrazzio, A. & Nava, S. (2019), ‘Ex-post assessment of merger control decisions in digital markets’, Document prepared by Lear for the Competition and Markets Authority.

Argentesi, E., Buccirossi, P., Calvano, E., Duso, T., Marrazzo, A. & Nava, S. (2019), ‘Merger policy in digital markets: An ex-post assessment’. Armstrong, M. (2006), ‘Competition in two-sided markets’, The RAND Journal of Economics 37(3), 668–691.

Athey, S., Calvano, E. & Gans, J. S. (2016), ‘The impact of consumer multi-homing on advertising markets and media competition’, Management Science 64(4), 1574–1590.

Bakos, Y. & Halaburda, H. (2019), ‘Platform competition with multihoming on both sides: Subsidize or not?’, Available at SSRN 3468457.

Beebe, J. H. (1977), ‘Institutional structure and program choices in television markets’, The Quarterly Journal of Economics 91(1), 15–37.

Belleflamme, P. & Peitz, M. (2019a), ‘Managing competition on a two-sided platform’, Journal of Economics & Management Strategy 28(1), 5–22.

Belleflamme, P. & Peitz, M. (2019b), ‘Platform competition: Who benefits from multihoming?’, International Journal of Industrial Organization 64, 1–26.

Biglaiser, G., Calvano, E. & Crémer, J. (2019), ‘Incumbency advantage and its value’, Journal of Economics & Management Strategy 28(1), 41–48.

Britainthinks (2018), ‘Control, alt or delete? consumer research on attitudes to data collection and use’, Which? POLICY RESEARCH REPORT, June 2018.

Brynjolfsson, E., Collis, A. & Eggers, F. (2019), ‘Using massive online choice experiments to measure changes in well-being’, Proceedings of the National Academy of Sciences 116(15), 7250–7255.

Calvano, E. & Polo, M. (2019), ‘Strategic differentiation by business models: Free-to-air and pay-tv’, Economic Journal. Forthcoming.

Calvano, E. & Polo, M. (2020), ‘Strategic differentiation by business models: Free-to-air and pay-tv’, The Economic Journal 130(625), 50–64.

Carroni, E., Madio, L. & Shekhar, S. (2019), ‘Superstars in two-sided markets: exclusives or not?’, Available at SSRN 3243777.

Choi, J. P. (2010), ‘Tying in two-sided markets with multi-homing’, The Journal of Industrial Economics 58(3), 607–626.

Choi, J. P., Jullien, B. & Lefouili, Y. (2017), ‘Tying in two-sided markets with multi-homing: Corrigendum and comment’, The Journal of Industrial Economics 65(4), 872–886.

Crampes, C., Haritchabalet, C. & Jullien, B. (2009), ‘Advertising, competition and entry in media industries’, The Journal of Industrial Economics 57(1), 7–31.

D’Annunzio, A. & Russo, A. (2019), ‘Ad networks, consumer tracking, and privacy’, Management Science, Forthcoming.

Digital Platforms Inquiry: Final Report, 2019 (2019).

EC Case M.8124-Microsoft/LinkedIn. European Commission Decision C(2016)8404, 2016 (2019).

Esayas, S. (2018), ‘Privacy as a non-price competition parameter: Theories of harm in mergers’, University of Oslo Faculty of Law Research Paper (2018-26). Evans, D. S. (2011), ‘Antitrust economics of free’, Competition Policy International, Spring.

Huang, J., Reiley, D. & Riabov, N. (2018), ‘Measuring consumer sensitivity to audio advertising: A field experiment on pandora internet radio’, Available at SSRN 3166676.

Motta, M. & Peitz, M. (2020), ‘Big tech mergers’.

Prat, A. & Valletti, T. M. (2019), ‘Attention oligopoly’, Available at SSRN 3197930.

Reyna, A. (2018), ‘The psychology of privacy-what can behavioral economic contribute to competition in digital markets?’, International Data Privacy Law 8(3), 240–252.

Rochet, J.-C. & Tirole, J. (2003), ‘Platform competition in two-sided markets’, Journal of the European Economic Association 1(4), 990–1029.

Rochet, J.-C. & Tirole, J. (2006), ‘Two-sided markets: a progress report’, The RAND Journal of Economics 37(3), 645–667.

Scott Morton, F., Bouvier, P., Ezrachi, A., Jullien, B., Katz, R., Kimmelman, G., Melamed, A. & Morgenstern, J. (2019), ‘Committee for the study of digital platforms: Market structure and antitrust subcommittee-report’, Chicago: Stigler Center for the Study of the Economy and the State, University of Chicago Booth School of Business.

Spence, M. & Owen, B. (1977), ‘Television programming, monopolistic competition, and welfare’, The Quarterly Journal of Economics pp. 103–126.

Steiner, P. O. (1952), ‘Program patterns and preferences, and the workability of competition in radio broadcasting’, The Quarterly Journal of Economics 66(2), 194–223.

Stucke, M. E. & Grunes, A. P. (2015), ‘Debunking the myths over big data and antitrust’, CPI Antitrust Chronicle, May.

Waehrer, K. (2016), ‘Online services and the analysis of competitive merger effects in privacy protections and other quality dimensions’, Available at SSRN 2701927.

Wilbur, K. C. (2008), ‘A two-sided, empirical model of television advertising and viewing markets’, Marketing science 27(3), 356–378.