Open and closed systems of two-sided networks

Abstract

Firms with two-sided networks facilitate connections or transactions between two distinct populations of consumers. This paper analyzes the behavior of such firms where there are no intrinsic benefits to consumers other than the network effects, such as employment agencies, real estate agents and videogame platforms. The modelling framework encompasses both matching service and platform business models and allows for subscription or per-transaction pricing. Three different market structures are considered: monopoly, and duopoly with and without compatibility. Comparisons of prices, profits, consumer surplus, and welfare are made between the three regimes. It is shown that duopoly with compatibility is socially preferable to the other regimes, while monopoly is socially preferable to duopoly without compatibility.