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DOCTORAL DISSERTATION PAPER #1, EVANGELOS KATSAMAKAS Design and ownership of two-sided networks: implications for Internet intermediaries

By Evangelos Katsamakas and Yannis Bakos


Many Internet intermediaries are two-sided networks, i.e. they provide the infrastructure to bring two sides (e.g. buyers and sellers) together. We develop a model that characterizes the value created by two-sided networks, and the allocation of that value across the two sides. When the asymmetry of the network effects is large, then the side with the low network effect participates for free. We depart from existing networks literature by endogenizing the network effects and focusing on the network design resulting from investments in network effects. We show that under certain assumptions about the returns to scale of available technologies, the design of a two-sided network is characterized by maximally asymmetric allocation of surplus independent of the ownership regime. Exceptions are cases where there is significant reusability of investment across sides, or the designer has little influence over the network effect (i.e., the network effects are predominantly exogenous). The optimal ownership is either ownership by the side enjoying the strongest inherent network effect, or by the side enjoying the design technology with the strongest return

Year: 2008
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