DP6214 Intermediation and Investment Incentives

Author(s): Paul Belleflamme , Martin Peitz

Publication Date: March 2007

Keyword(s): intermediation , investment incentives , network effects , two-sided markets

JEL(s): D40 , L10

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP6214.asp.asp

We analyze whether and how the fact that products are not sold on open or public platforms but on competing for-profit platforms affects sellers’ investment incentives. Investments in cost reduction, quality, or marketing measures are here the joint and coordinated efforts by sellers. We show that, in general, for-profit intermediation is not neutral to such investment incentives. As for-profit intermediaries reduce the rents that are available in the market, one might suspect that sellers have weaker investment incentives with competing for-profit platforms. However, this is not necessarily the case. The reason is that investment incentives affect the size of the network effects and thus competition between intermediaries. In particular, we show that whether for-profit intermediation raises or lowers investment incentives depends on which side of the market singlehomes.