| In the new economy and the digital markets of 21st century, the network effects are more important than they have ever been. Nevertheless, many characteristics of the network markets remain unexplored. The subject of this study is markets with network externalities, in particular, two-sided markets and online markets. What was the impact of network externalities on these markets? First, I show that, in a two-sided market setup, the competition between agents at one side for the agents of the other side affects the market equilibrium: Either a symmetric network where the same fee is charged from both sides or an asymmetric network where the platform is free for one side and relatively expensive for the other would be formed by a monopolist matchmaker. Secondly, I constructed a model of entry decision of a traditional firm to an online market, and investigated the impact of network externalities on traditional firm's decision. Specifically, I formed a model where traditional firms dilemma is between entering and capturing a high market share in the online market due to its high-brand value, at the cost of increasing the popularity of this online market, and not entering, that is, the wait-and-see strategy. The results suggest that as the extent of network effect grow, non-entry strategy becomes more appealing for the traditional firm. However, this relationship is reversed for if the network effect is too big, as then, traditional firm would like to benefit from the high willingness to pay for the online market rather than taking the risking its potential dominance in the online market. |
