Chicken & Egg: Competition Among Intermediation Service Providers

TLDR

The study focuses on informational intermediation on the Internet, where indirect network externalities, nonexclusive services, and identity‑based price discrimination shape competition, and intermediaries are incentivized to offer nonexclusive services to moderate competition and exercise market power. We analyze a model of imperfect price competition between intermediation service providers. We analyze in detail the pricing and business strategies followed by intermediation services providers. Efficient market structures emerge in equilibrium, as well as some specific form of inefficient structures.

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.