Presence Of Indirect Network Effects Research Articles

DIGITAL PLATFORMS AS A CONDITION FOR INCREASING INNOVATION AND COMPETITIVENESS OF SMALL AND MEDIUM ENTERPRISES IN THE EU

The purpose of the study is to consider the potential of digital platforms as an environment for the formation of new types of relationships to promote the development of innovation and competitiveness of small and medium-sized enterprises in the EU. The main goal of digitalization, as defined in the normative documents of the European Commission, is to improve the use of the potential of information and communication technologies to promote innovation, support economic development and stimulate scientific and technological progress in general, and ultimately contribute to the formation of “smart”, sustainable and inclusive growth of the region’s economy A set of important measures is already being implemented and developed. Among them, the creation of a single digital market, which is considered as a primary goal of the European Commission strategy to ensure guaranteed access to online activities for citizens and businesses in a fair competitive environmen. Measures are being taken to reduce the cost of intercountry shipping of goods purchased online, the prices of which are 3-5 times higher than those for transactions carried out within individual countries. In order to enable the digital transformation of European industry and services, particular attention will be paid to the development of cross-sector, integrated digital platforms and large-scale pilot platforms for experimentation and co-creation with users. We define a digital platform as an organisation that offers digital services facilitating interactions between two or more different but interdependent groups of users (suppliers and individuals) via the Internet and that generate network effects. The following are characteristics of a systemically important digital platform: operating in a majority of EU countries; having significant influence on the internal market, namely the annual turnover of a group of companies; the ability to connect a large number of users with a large number of suppliers of goods (services), namely more than 45 million monthly active users located in the EU, or more than 10,000 commercial users located in the EU in the last financial year); having established economic power and stable income from intermediary services provided in the EU. In the presence of indirect network effects, the volume of demand for the platform's services will depend, among other things, on the price level and the economic model of the ecosystem. Also, when developing the EU draft law on digital markets, the European Commission, while formulating the characteristics of digital ecosystems (large digital platforms), noted the importance of having a plurality of digital services. The concept of a digital ecosystem should not include digital platforms with a single service. The digital nature of the ecosystem allows it to quickly introduce new functions and integrate data across multiple unrelated business lines and markets. These factors allow the ecosystem to avoid the traditional costs associated with rapid business expansion, both vertically (by using its services in new markets) and horizontally (by expanding the “range” of services). The digital platform uses information about the sales of suppliers on its platform to research the market and develop its own line of competing products. In this regard, the company can be accused of promoting its own products in this way. These features of the functioning of digital platforms determine the need to revise the criteria for compliance with the principles of competition. As a result of processing the user habits of citizens, the ecosystem issues a personalized offer. The consequence of this may be price discrimination, when some customers are offered more expensive goods than others, depending on their purchasing power. In this regard, it is proposed to oblige platforms to disclose the principles of such pricing. Disclosure requirements and pricing transparency are effective mechanisms for regulating the existing problem, since they increase consumer awareness, facilitate price comparison and prevent consumers from being misled. However, experts note that disclosure of pricing rules can weaken competition in the market and increase the overall price level. This measure can also lead to a lag in the development of recommendation services in the global market, a violation of commercial secrets, additional costs and a slowdown in the development of digital platforms.

Estimation of the indirect network effect: On the example of television advertising

The platform is an intermediary between groups of users whose direct interaction without the platform would be complicated or unachievable. A distinctive feature of platform markets is the presence of indirect network effects (or cross‐platform effects), which consist of the fact that the demand of one group of users for platform services affects the demand of another group of users. In the presence of multidirectional network effects, an important platform’s business decision is to determine the optimal volume of services that create negative network effects, since after a certain amount of effects the company starts to lose users on the other side of the platform. For the business model to be successful and profitable, the platform should take this relationship into account. This study makes a quantitative assessment of cross‐ platform network effects using data from the Russian television market. The author of the study obtained statistically significant positive audience effect and negative advertising effect.

Competition among parking platforms in the presence of indirect network effects

A parking market including conventional public parking and novel shared parking is considered for matching parking demands and supplies. To investigate the competition between the public parking platform and the shared parking platform, a market equilibrium approach is proposed to investigate the interactions among the parking platforms, parking demanders, and parking owners, where indirect network effects referring mutual attractions between demands and supplies are incorporated. Targeted for profit maximization, we first formulate a basic model and derive the equilibrium results of parking platforms’ profits. Results show that indirect network effects positively affect the two parking platforms’ profits when the equivalent gains from alternative activities for parking owners are large, while negatively affect the profits otherwise in certain cases. Extensions regarding some considerations are then discussed, where Model D is proposed for dual decision of the shared parking platform and Model S is proposed for the social welfare maximization objective of the public parking platform. Comparisons of the three models in terms of equilibrium results are simulated consequently. Managerial implications to enhance the profits of the two parking platforms are further discussed.

Competition Among Parking Platforms in the Presence of Indirect Network Effects

Competition Among Parking Platforms in the Presence of Indirect Network Effects

Platform competition with complementary products

We characterize the pricing structure in a model of platform competition in which two firms offer horizontally differentiated platforms and two sets of complementors offer products that are exclusive to each platform, respectively. We highlight the presence of indirect network effects: platforms and complementors benefit from the quality and number of firms in their group and suffer from the quality and number of firms in the rival’s group through their effects on prices and market share. We then determine the incentives of platforms to subsidize the independent complementors in an equilibrium. We further analyze the incentives of each platform to form a strategic alliance with complementors through contractual exclusivity or technological compatibility, or to integrate with the complementors. Finally, we discuss the welfare consequences of these strategies.

Recent Developments at the CMA: 2017–2018

We describe three interesting cases that the UK Competition and Markets Authority (CMA) has dealt with over the past year: first, we discuss the merger of two online food ordering platforms—Just Eat and Hungryhouse—which required an assessment of competition in the presence of indirect network effects. Second, we discuss the vertical merger of a grocery retailer and wholesaler—Tesco and Booker—which posed the challenge of how to assess a firm’s incentives to foreclose its rivals when there are thousands of local markets. Finally, we discuss Open Banking, which lies at the heart of the package of remedies that came out of the CMA’s market investigation into personal banking, and sought to tackle issues of low customer engagement.

A hedonic approach to testing for indirect network effects in the LCD television market

Using data from CNet's Shopper's.com on prices and television characteristics, we use a quality-adjusted, hedonic price regression to test for the presence of indirect network effects in the television market. In 2009, broadcasters were mandated to cease programme transmission using analog signals, and convert to digital signal transmission, necessitating changes to the reception mechanisms themselves, televisions. Digital signal transmission permits broadcasters to offer greater programming variety, which makes televisions more valuable to consumers. Similarly, the presence of adapters on televisions enables compatibility with a multitude of complementary devices, also increasing consumers' values of televisions. Our results are consistent with the presence of indirect network effects arising from each of these sources.

Indirect network effects and the impact of trade liberalization: A note

In this note, we examine how trade liberalization affects production structure in the presence of indirect network effects (hardware/software systems). For these purposes we construct a simple two-country model of trade with two incompatible hardware technologies. It is shown that, given that both types of hardware exist before trade liberalization, liberalization and increased intra-industry trade in software products may reduce the variety of hardware technology via intensified network effects. It is also shown that, contrary to the findings of previous studies on intra-industry trade, some consumers may become worse off as the result of trade.

Empirically Testing for Indirect Network Externalities in the LCD Television Market

This paper examines price data on over 222 LCD televisions to estimate indirect network effects arising from two sources. First, we conjecture that the disconnect between the timing of when broadcasters are required to convert to an only-digital-signal world and when television manufacturers are required to have an ATSC digital tuner install on all new televisions has created an indirect network effect whereby television that are backward compatible with the NTSC analog QAM and VSB-8 systems have short-run value. Over time, however, we argue that the ATSC digital tuner will become more valuable. The second indirect network effect we estimate stems from the number and types of ports available on LCD televisions. In each case, we find statistically significant evidence for the presence of indirect network effects in the market for LCD televisions.

Winning while losing: Competition dynamics in the presence of indirect network effects

What determines competition dynamics in markets with indirect network effects? We analyze this question in a dynamic hardware–software framework, where software firms compete in quality upgrades. We identify market structure as a major determinant of competition dynamics. Indirect network effects tie together the performance of firms on the same platform: a successful competitor raises the value of all firms on the same platform, where an unsuccessful firm may enjoy a windfall increase in its market value. In contrast to the tipping result in the literature, we find tendencies toward increasing competition across platforms for a wide range of market structures.

Winning While Losing: Competition Dynamics in the Presence of Indirect Network Effects

What determines competition dynamics in markets with indirect network effects? We analyze this question in a dynamic hardware-software framework, where software firms compete in quality upgrades. We identify market structure as a major determinant of competition dynamics. Indirect network effects tie together the performance of firms on the same platform: A successful competitor raises the value of all firms on the same platform, where an unsuccessful firm may enjoy a windfall increase in its market value. In contrast to the tipping result in the literature, we find tendencies towards increasing competition across platforms for a wide range of market structures.

To Hunt Or to Scavenge: Optimal Investment Strategies in the Presence of Indirect Network Effects

What determines optimal R&D investment in a market with indirect network effects? We analyze this question in a hardware-software framework, where software firms strategically invest in quality upgrades. We find that a firm's optimal investment depends predominantly on (1) its quality level relative to its competitors on the same hardware and on (2) the quality level of software firms on the same hardware relative to other hardware platforms. Using a dynamic model, we examine the effect of initial quality differences within and across platforms on firms' investment behavior. We show that small quality differences across platforms stimulate investment across firms on the same platform, regardless of their current quality level. However, large quality differences across platforms affect competition within platforms such that a firm's quality level relative to competitors on the same platform may increase or reduce its incentives to invest. In this case, responses to own and cross quality upgrades are determined by the overall market structure. The two different responses - increased or reduced investment, give rise to a taxonomy of optimal investment strategies. Since responses depend on market structure, we can then map a firm's position within the market into its optimal investment strategy.