Three essays on network economics

Abstract

My paper, "Merchant, Platform or Hybrid Mode?", studies how nonlinearity and asymmetry of demands and endogenous entry of suppliers impact the intermediary's choice to be a platform, a merchant, or a hybrid intermediary, and identifies conditions for each mode of market making to be chosen. When the number of suppliers is fixed and demands for the suppliers' commodities are linear, it is optimal for the intermediary to be a platform. In contrast, when consumers possess nonlinear demands originating from symmetric Cobb-Douglas utility functions, it is optimal for the intermediary to be a merchant if the parameter is small; otherwise it is optimal to be a hybrid. In the case of asymmetric Cobb-Douglas utility functions, we also identify conditions under which it is optimal to be a hybrid intermediary. Finally, in a setting of endogenous supplier entries (while maintaining the assumption of linear demands), we also provide the necessary and sufficient condition under which it is optimal for the intermediary to be a merchant. Our findings provide new explanations for the empirically observed co-existence of three modes of intermediation chosen by different market makers. We show that the intermediary would choose the merchant mode (platform mode) while the government which maximizes social welfare should force the intermediary to choose the platform mode (merchant mode). My paper, "The Utility Competition, Price Competition and Quantity Competition", proposes the framework of utility competition which is easier to model with unique equilibrium even facing network externality; then I provide the intuition why price competition (PC), quantity competition (QC) and utility competition (UC) differ, and prove it with nonlinear demand system. If externality is positive, then PC is the most efficient one with lowest equilibrium price, QC is the least efficient one with highest equilibrium price, and UC is in the middle. While if externality is negative, then UC is the most efficient one with lowest equilibrium price, QC is still the least efficient one with highest equilibrium price, and PC is in the middle. And if firms are substitutes, then rank of the equilibrium profit is the same to the rank of price. Otherwise, if firms are complements, then the rand of the equilibrium profit is opposite to the rank of price. My paper, "The Utility Competition and Commitment in Two Sided Market", studies the welfare effect of sequential entry of two sided market and commitment. In two sided markets, instead of joining the platform simultaneously, two groups could join the platform sequentially. For example, group 1 consumers could join the platform before group 2 consumers. Simultaneous entry is equivalent to sequential entry with commitment. Our paper is the first to analyze the welfare effects of sequential entry and commitment. Under monopoly, commitment case is equivalent to no commitment case. With competing firms, there are two cases to consider. For case 1, if two groups are complementary, compared with commitment case, utilities for both groups of consumers are higher under no commitment case. Besides, higher equilibrium utility will lead to higher demand as well. However, if firms are substitutes, profit is higher under commitment case than no commitment case. Case 2 is opposite to case 1. If only group 1 consumers can multi-home, the comparison is the same to single-homing case. If only group 2 consumers can multi-home, then commitment case is equivalent to no commitment case.