Two-sided Market and Bertrand Competition: When Do Indirect Network Effects Widen the Platformers’Gap?

In a two-sided market, there are product or services makers who want to reach potential customers and consumers that search providers of products or services via platforms. For example, Google has its search engine, and users are potential customers for their advertisement services. In two-sided markets the platform providers have a pair of markets that are linked by inter-market externality. If the members of one of the two-sided markets are better off by the increase of the size of the other market, the second market has positive indirect network effect on the first. This inter-market externality enables the profit subsidy from the first to the second. This asymmetric character of the two-sided market is called“the Seesaw Principle”that has been studied in the scholarly literature by comparative statistics of two-sided markets. In the scholarly literature, it is well known that platformers maximize the sum of each market and that it causes the inefficiency of the price mechanism for each market. However, since most of the studies fix the number of platforms exogenously, the impact of the network effect on the market size is unclear. In this paper, the problem is formulated as a Bertrand–Nash oligopolistic competition. In contrast to what has been suggested by the existing scholarly literature, we have demonstrated that in our setting, the indirect network effect can result in monopoly nor competitiveness. Also, we have shown analytically how network effects widen the gap among platforms.