1. What is the difference between same-side exchange benefits and cross-side exc
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Question
1. What is the difference between same-side exchange benefits and cross-side exchange benefits?2. What is the difference between a one-sided market and a two-sided market?
3. Give examples of one-sided and two-sided markets.
4. Identify examples of two-sided markets where both sides pay for a product or service. Identify examples where only one side pays. What factors determine who should pay? Does paying have implications for the establishment and growth of a network effect? What might a firm do to encourage early network growth?
5. The Apple iPhone Developer Program provides developers access to the App Store where they can distribute their free or commercial applications to millions of iPhone and iPod touch customers. Would the iPhone market be considered a one or two-sided market?
6. How is competition in markets where network effects are present different from competition in traditional markets?
7. What are the reasons it is so difficult for late-moving, incompatible rivals to compete in markets where a dominant, proprietary standard is present? What is technological leapfrogging and why is it so difficult to accomplish?
8. Does it make sense to try to prevent monopolies in markets where network effects exist?
9. Are network effects good or bad for innovation? Explain.
11. What is the relationship between network effects and the bargaining power of participants in a network effects “ecosystem”?
12. Cite examples where the best technology did not dominate a network effects-driven market.
Explanation / Answer
1. This article extends antitrust analysis to two-sided markets in which a virtual monopolist competes with local bricks-and-mortar dealers. The discussion examines the market power of an Internet market maker as well as an Internet matchmaker. The analysis shows that equilibrium in a two-sided market can be characterized as a one-sided market in which transaction demand depends on the bid-ask spread of the central market maker. This allows for a straightforward extension of critical demand elasticity and critical loss analysis from one-sided markets to two-sided markets, with antitrust tests based on the hypothetical monopolist's bid-ask spread. Antitrust analysis of a one-sided market also carries over to a two-sided market with a matchmaker where antitrust tests are based on the sum of participation fees. After studying this section you should be able to: Recognize distinguish between one-sided and two-sided markets. Understand same-side and cross-side exchange benefits. To understand the key sources of network value, it’s important to recognize the structure of the network. Some networks derive most of their value from a single class of users. An example of this is instant messaging (IM). While there might be some add-ons for the most popular IM tools, they don’t influence most users’ choice of an IM system. You pretty much choose one IM tool over another based on how many of your contacts you can reach. Economists would call IM a one-sided marketA market that derives most of its value from a single class of users (e.g. instant messaging). (a market that derives most of its value from a single class of users), and the network effects derived from IM users attracting more IM users as being same-side exchange benefitsBenefits derived by interaction among members of a single class of participant (e.g. the exchange value when increasing numbers of IM users gain the ability to message each other). (benefits derived by interaction among members of a single class of participant). But some markets are comprised of two distinct categories of network participant. Consider video games. People buy a video game console largely based on the number of really great games available for the system. Software developers write games based on their ability to reach the greatest number of paying customers, and so they’re most likely to write for the most popular consoles, first. Economists would call this kind of network a two-sided marketNetwork markets comprised of two distinct categories of participant, both of which that are needed to deliver value for the network to work (e.g. video game console owners and developers of video games). (network markets comprised of two distinct categories of participant, both of which that are needed to deliver value for the network to work). When an increase in the number of users on one side of the market (say console owners) creates a rise in the other side (software developers), that’s called a cross-side exchange benefitWhen an increase in the number of users on one side of the market (say console owners) creates a rise in the other side (software developers).. AIM is considered a one-sided market, where the value-creating, positive-feedback loop of network effects comes mostly from same-side benefits from a single group (AIM members who attract other AIM members who want to communicate with them). Video game consoles, however, are considered a two-sided network, where significant benefits come from two distinct classes of users that add value from cross-side benefits by attracting their opposite group. In the game console market, more users of a console attract more developers who write more software for that console, and that attracts more users. Game availability is the main reason the Sony Playstation 2 dominated over the original XBox. It is possible that a network may have both same-side and cross-side benefits. XBox 360 benefits from cross-side benefits, in that more users of that console attract more developers writing more software titles, and vice versa. However, the XBox Live network that allows users to play against each other has same-side benefits. If your buddies use XBox Live and you want to play against them, you’re more likely to buy an XBox. In one-sided markets, users gain benefits from interacting with a similar category of users (think instant messaging, where everyone can send and receive messages to one another). In two-sided markets, users gain benefits from interacting with a separate, complementary class of users (e.g. in the video game industry console owners are attracted to platforms with the most good games, while innovative developers are attracted to platforms that have the most users). Unseating a firm that dominates with network effects can be extremely difficult, especially if the newcomer is not compatible with the established leader. Newcomers will find their technology will need to be so good, that it must leapfrog not only the value of the established firm’s tech, but also the perceived stability of the dominant firm, the exchange benefits provided by the existing user base, and the benefits from any product complements. For evidence, just look at how difficult it’s been for rivals to unseat the dominance of Windows. Because of this, network effects might limit the number of rivals that challenge a dominant firm. But the establishment of a dominant standard may actually encourage innovation within the standard, since firms producing complements for the leader have faith the leader will have staying power in the market. What is the difference between same-side exchange benefits and cross-side exchange benefits? What is the difference between a one-sided market and a two-sided market? Give examples of a one-sided and two-sided markets. The Apple iPhone Developer Program provides developers access to the App Store where they can distribute their free or commercial application to millions of iPhone and iPod touch customers. Would the iPhone market be considered a one or two-sided market? How might the establishment of a dominant standard serve to encourage innovation? What is the Microsoft Developer’s Network (MSDN)? What is the benefit to Microsoft of establishing and supporting a developer’s network?
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