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Competing for contacts: network competition, trade intermediation and fragmented duopoly

Author

Listed:
  • Petropoulou, Dimitra
Abstract
A two-sided, pair-wise matching model is developed to analyse the strategic interaction between two information intermediaries who compete in commission rates and network size, giving rise to a fragmented duopoly market structure. The model suggests that network competition between information intermediaries has a distinctive market structure, where intermediaries are monopolistic service providers to some contacts but duopolists over contacts they share in their network overlap. the intermediaries' inability to price discriminate between the competitive and non-competitive market segments, gives rise to an undercutting game, which has no pure strategy Nash equilibrium. The incentive to randomise commission rates yields a mixed strategy Nash equilibrium. Finally, competition is affected by the technology of network development. The analysis shows that either a monopoly or a fragmented duopoly can prevail in equilibrium, depending on the network-building technology. Under convexity assumptions, both intermediaries invest in a network and compete over common matches, while randomising commission rates. In contrast, linear network development costs can only give rise to a monopolistic outcome.

Suggested Citation

  • Petropoulou, Dimitra, 2008. "Competing for contacts: network competition, trade intermediation and fragmented duopoly," LSE Research Online Documents on Economics 19630, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:19630
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    File URL: http://eprints.lse.ac.uk/19630/
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    References listed on IDEAS

    as
    1. Michael R. Baye & Casper G. De Vries, 1992. "Mixed Strategy Trade Equilibria," Canadian Journal of Economics, Canadian Economics Association, vol. 25(2), pages 281-293, May.
    2. Caillaud, Bernard & Jullien, Bruno, 2003. "Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-328, Summer.
    3. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    4. T. Randolph Beard & George S. Ford & R. Carter Hill, 2005. "Fragmented Duopoly: A Conceptual and Empirical Investigation," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2377-2396, November.
    5. Caillaud, Bernard & Jullien, Bruno, 2001. "Competing cybermediaries," European Economic Review, Elsevier, vol. 45(4-6), pages 797-808, May.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Gabriel Felbermayr & Benjamin Jung, 2011. "Trade Intermediation and the Organization of Exporters," Review of International Economics, Wiley Blackwell, vol. 19(4), pages 634-648, September.

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    More about this item

    Keywords

    International Trade; Pairwise Matching; Information Cost; Intermediation; Networks;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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