Two-Sided Markets with Pecuniary and Participation Externalities
CESifo, Munich, 2006
CESifo Working Paper No. 1776
![](https://cesifo.org/DocImg/cesifo1_wp1776.jpg?c=1689236952)
The existing literature on "two-sided markets" addresses participation externalities, but so far it has neglected pecuniary externalities between competing platforms. In this paper we build a model that incorporates both externalities. In our setup differentiated platforms compete in advertising and offer consumers a service free of charge (such as a TV program) that is financed through advertising. We show that advertising can exhibit the properties of a strategic substitute or complement. Surprisingly, there exist cases in which platforms benefit from market entry. Moreover, we show that from a welfare point of view perfect competition is not always desirable.