Abstract:

This paper investigates firms’ pricing decisions and consumers’ network choices in two-sided markets with network externalities. Consumers are heterogeneous in how much they value the externality. We show that imposing some restrictions on the extent of coordination failure among consumers leads to clear qualitative conclusions about equilibrium market configurations. Multiple asymmetric networks can coexist in equilibrium, both in the case of a monopolist network provider and in the case of competing providers. These equilibria have the property that can be observed in many different two-sided markets: one network is cheaper and larger on one side, while the other network is cheaper and larger on the other side. Product differentiation is endogenized by consumers’ network choices.