There are examples of entry in two-sided markets, where first entrants
occupy a 'central location' and serve agents with 'intermediate tastes',
while later entrants are niche players. Why would the first entrant
choose to become a 'general' platform, given that later entrants will
not have enough room for differentiation, resulting in an intense price
competition? This one-sided market logic may not apply in a two-sided
market. A key difference in a two-sided market, stemming from the
presence of cross-group network externalities, is stronger demand
creation. We develop a model which can deliver the above mentioned
empirical observation, when the network externalities are intermediate.
On the other hand, when externalities are low, our model predicts that
differentiation will be maximum, as it would be in a one-sided market.
Finally, for strong externalities only one platform is active and
locates at the center
Get PDF
