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Unformatted text preview: Review of Network Economics Vol.x, Issue x – March 2007 When Does the Winner Take All in Two-Sided Markets? MINGCHUN SUN * Global Economics ， Lehman Brothers Asia Limited EDISON TSE Management Science and Engineering Department, Stanford University Abstract We study the diffusion of competing two-sided networks using a differential game framework. We find that whether the winner takes all in steady state depends on the participation behaviour of individual agents on both sides of the market. When individual agents on either side of the market tend to participate in only one network, one network will dominate the market. As the tendency for joining multiple networks increases, the possibility for two networks to co-exist in the long-run also increases. Thus the steady-state market share of competing two-sided networks can be very different depending on adopters’ choice of “multi-homing” or “single-homing” behaviour. 1 Introduction Two-sided market is a recent development in the field of economics with early contributions coming from Armstrong (2006), Caillaud and Jullien (2003), Park and Van Alstyne (2005), Rochet and Tirole (2003) and Schiff (2003) among others. In such a market, two groups of agents interact with each other via a common network platform and the value of participating in the network for agents in one group depends on the number of participants from the other group. Though the concept is new, two-sided markets are widely seen around us. For example, PC operating systems, online auction websites, shopping malls, dating services and nightclubs, and even language are all two-sided networks. Most technology standards, such as VCR and DVD formats, modem standards, typewriter keyboard, etc. are two-sided networks. An interesting phenomenon in two-sided markets is that in some of them, the winner seems to take all market shares, whereas in other markets multiple networks can co-exist and share the market. In Table 1, we show that, in certain two-sided markets such as PC operating system, VCR format and typewriter keyboard, etc., one network takes all or almost all market share. On the other hand, in two-sided markets such as credit card, we see four major payment networks: VISA, MasterCard, American Express and Discover. In the video * Contact author. Mailing address: Flat E, 65 Floor, Tower 5, Sorrento, No. 1 Austin Road West, Kowloon, Hong Kong. E-mail: [email protected] Review of Network Economics game console market, there are three major game systems: Sony’s PlayStation, Microsoft’s Xbox, and Nintendo’s GameCube. In the yellow directory market, multiple directories exist in almost every local market. The variation in network dominance among two-sided markets indicates that “winner-takes-all” is not an inherent nature of two-sided markets. It thus brings interesting and important questions such as: what determines the dominance or co-existence of two-sided networks? What helps a particular network to dominate the market? What actions two-sided networks?...
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This note was uploaded on 06/16/2010 for the course MS&E 201 taught by Professor Edisontse during the Spring '08 term at Stanford.
- Spring '08