Asymmetric Network Effects

Abstract

When platforms compete for consumers, two types of consumer heterogeneity will matter: consumers value the presence of other consumers on a platform differently, and consumers contribute to the value of the platform differently. The optimal discriminatory pricing policy for platforms will depend on whether those two dimensions of consumer heterogeneity are positively or negatively correlated, which is an empirical question. In a companion paper (Cantillon & Yin, 2008), we study membership decisions of trading firms for two competing exchanges: LIFFE and DTB. Our analysis shows that different traders care about liquidity differently. In this paper, we estimate the heterogeneous contribution to liquidity by diff erent types. We combine the estimates from both papers of heterogeneous preferences and contributions to liquidity. (JEL L1, G15; keywords derivatives exchange; network effects; heterogeneity; entry strategy; adoption; liquidity; platform competition)