Ad-sponsored Business Models and Compatibility Incentives of Social Networks

This paper examines social networks' incentives to establish compatibility under fee and ad-sponsored business models. I analyze the competition between two social networks and show that compatibility is only possible when the two networks are ad-sponsored. I also find that even when both networks are ad-sponsored, a network with a significant installed-base advantage may choose not to be compatible when the cost from sharing the market outweighs the benefit from additional ad profits. Finally, compatibility also requires a significant number of single-homing users. The results are consistent with empirical observations of social networks and suggest that increased adoption of ad-sponsored business models may lead to many de-facto standards in high-technology industries.

[1]  Jean Jaskold Gabszewicz,et al.  Does advertising lower the price of newspapers to consumers? A theoretical appraisal , 2005 .

[2]  David Gabel,et al.  Opening Networks to Competition: The Regulation and Pricing of Access. David Gabel and David Weiman , 1998 .

[3]  Bruce M. Owen,et al.  Television Programming, Monopolistic Competition, and Welfare , 1977 .

[4]  Matthew T. Clements,et al.  Direct and Indirect Network Effects: Are They Equivalent? , 2004 .

[5]  Joseph Farrell,et al.  Standardization, Compatibility, and Innovation , 1985 .

[6]  Geoffrey G. Parker,et al.  Two-Sided Network Effects: A Theory of Information Product Design , 2010, Manag. Sci..

[7]  Simon P. Anderson,et al.  Market Provision of Broadcasting: A Welfare Analysis ∗ , 2003 .

[8]  J. Rochet,et al.  Platform competition in two sided markets , 2003 .

[9]  Gerald R. Faulhaber.  Network effects and merger analysis: instant messaging and the AOL–Time Warner case , 2002 .

[10]  Nicholas Economides,et al.  Compatibility and Market Structure for Network Goods , 1997 .

[11]  Jack H. Beebe.  Institutional Structure and Program Choices in Television Markets , 1977 .

[12]  Marius Schwartz,et al.  Compatibility Incentives of a Large Network Facing Multiple Rivals , 2006 .

[13]  Joseph Farrell,et al.  Installed base and compatibility : innovation, product preannouncements and predation , 1986 .

[14]  Joel A. C. Baum,et al.  Time to Break Up: Social and Instrumental Antecedents of Firm Exits from Exchange Cliques , 2005 .

[15]  R. Gulati,et al.  Where Do Interorganizational Networks Come From?1 , 1999, American Journal of Sociology.

[16]  Chris Doyle.  Programming in a competitive broadcasting market: entry, welfare and regulation , 1998 .

[17]  N. Economides,et al.  One-Way Networks, Two-Way Networks, Compatibility, and Public Policy , 1994 .

[18]  Didier Laussel,et al.  Programming and Advertising Competition in the Broadcasting Industry , 2004 .

[19]  B. Caillaud,et al.  Chicken & Egg: Competition Among Intermediation Service Providers , 2003 .

[20]  P. Steiner.  Program Patterns and Preferences, and the Workability of Competition in Radio Broadcasting , 1952 .

[21]  Andrei Hagiu,et al.  Two-Sided Platforms: Pricing and Social Efficiency , 2004 .

[22]  Joel A. C. Baum,et al.  Dancing with Strangers: Aspiration Performance and the Search for Underwriting Syndicate Partners , 2005 .

[23]  Steinar Holden.  Network or pay-per-view?: A welfare analysis , 1993 .

[24]  Didier Laussel,et al.  Competition in the Media and Advertising Markets , 2006 .

[25]  Nicholas Economides,et al.  Networks and compatibility: Implications for antitrust , 1994 .

[26]  Bruno Jullien,et al.  Advertising, Competition and Entry in Media Industries , 2005 .

[27]  Anthony J. Dukes,et al.  Minimum Differentiation in Commercial Media Markets , 2003 .

[28]  R. Gulati.  Does Familiarity Breed Trust? The Implications of Repeated Ties for Contractual Choice in Alliances , 1995 .

[29]  C. Shapiro,et al.  Network Externalities, Competition, and Compatibility , 1985 .

[30]  U. Doraszelski,et al.  Avoiding market dominance: product compatibility in markets with network effects , 2009 .

[31]  Didier Laussel,et al.  TV-broadcasting competition and advertising , 2000 .

[32]  Jacques Crémer,et al.  Connectivity in the Commercial Internet , 2003 .

[33]  Ulrich Kaiser.  Do Media Consumers Really Dislike Advertising? An Empirical Assessment of a Popular Assumption in Economic Theory , 2007 .

[34]  Julian Wright,et al.  Multihoming and Compatibility , 2003 .