Abstract
Motivated by cloud services with ad-supported revenues, we consider the interplay of network effects, congestion, and competition in determining the market structure in such environments. In particular, we study the strategic interactions between competing service providers and a user base, modeling congestion sensitivity and two forms of positive network effects: “firm-specific” versus “industry-wide.” Our analysis reveals that users are generally no better off due to competition in a marketplace of ad-supported services as the congestion levels are of the same order as if there were only one firm. Further, our analysis highlights an important contrast between firm-specific and industry-wide network effects: multiple firms can coexist in a marketplace with industry-wide network effects, but near-monopolies tend to emerge in marketplaces with firm-specific network effects.
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