Competition in two-sided market : with heterogeneous users and negative externalities.

• Main Author: Chen, Hongyu.
• Other Authors: School of Humanities and Social Sciences
• Format: Final Year Project
• Language: English
• Published: 2013
• Subjects: DRNTU::Social sciences::Economic theory::Microeconomics
• Online Access: http://hdl.handle.net/10356/51870
• Institution: Nanyang Technological University

Social networking sites (SNS) like Facebook are fast becoming part of our daily lives. Increasingly, businesses and organizations are getting on this bandwagon as SNS have the ability to reach a large mass of the population and influence consumer behavior. Facebook reported annual revenue of US$5.1 billion in 2012 and boosts an active user population of more than 1 billion active users in 2012. The emergence of the SNS industry has large influence on every aspect of our society. Thus, it has attracted much academic attention, especially in social sciences. However, current papers do not consider heterogeneity and negative externality in the two-sided market modeling, which we first draw attention to these issues. This paper aims to study the market structure of the SNS industry and discuss the appropriate pricing strategies for the SNS firm. We first structured the general two-sided market model which contains only the end-users and advertisers. Under the two-sided market model, we observe that there exists full participation for end-users and under advertisement for advertisers. To make the model better fit the SNS industry; we introduced the third side of the market, namely application developers. By introducing app developers, we have found consistent results with the two-sided market, only that there are insufficient app developers under monopolist. Furthermore, we extend our model to a competitive environment, where two symmetric firms competing with each other. The result is consistent with previous model, which indicate that there will be insufficient advertisement in the competitive market comparing with the social optimum. Since most existing literature argue that advertisement is excessive in the market, while we find quite the opposite results. Such different conclusion is due to our unique setting of utility function and the introduction of heterogeneity and negative externalities.