Inter-Group and Intra-Group Externalities of Two-Sided Markets in Electronic Commerce

Abstract

The e-marketplaces, which play an important role in facilitating transactions and aggregating information in electronic commerce, show positive inter-group externalities where one group’s benefit from receiving a service depends on the number of the intermediary services consumed by the other group, and negative intra-group externalities where the surplus is destroyed because members within the group compete with each other. In this paper, with a different approach from the emerging two-sided markets theory and the traditional microeconomic theory, we analyze a monopolistic e-marketplace owned by a third-party firm by substituting the size of consumers with the number of intermediary services. Moreover, we pay close attention to solving the following problems: 1) When these inter- and intra-group externalities exist, are both the demand curves and the pricing strategies of intermediary services different from those of traditional goods? 2) How to price intermediary services to maximize profit in the e-marketplaces? 3) How do these network externalities affect the management strategy of platforms? Finally, we exemplify such analytical results as pricing strategies of platforms with managerial practice of electronic commerce.