Chicken & Egg: Competition among Intermediation Service Providers

TLDR

Informational intermediation on the Internet is shaped by indirect network externalities, the option to use nonexclusive services from multiple intermediaries, and widespread price discrimination by user identity and usage. The study analyzes imperfect price competition and the pricing and business strategies of intermediation service providers. The authors model imperfect price competition among intermediation service providers and examine their pricing and business strategies. The model predicts that equilibrium yields both efficient and certain inefficient market structures, and that intermediaries are incentivized to offer nonexclusive services to moderate competition and exercise market power. © 2003 RAND Corporation.

Abstract

We analyze a model of imperfect price competition between intermediation service providers. We insist on features that are relevant for informational intermediation via the Internet: the presence of indirect network externalities, the possibility of using the nonexclusive services of several intermediaries, and the widespread practice of price discrimination based on users' identity and on usage. Efficient market structures emerge in equilibrium, as well as some specific form of inefficient structures. Intermediaries have incentives to propose non-exclusive services, as this moderates competition and allows them to exert market power. We analyze in detail the pricing and business strategies followed by intermediation services providers. Copyright 2003 by the RAND Corporation.