The Effects Of Network Externalities In Two-sided Market

Along with the popularity of the Internet and the development of technology,various platforms influencing people's daily life.For the potential of two-sided market,an endless stream of new platforms is trying to enter in it.Direct network externality plays an important role in the market entry and market competition stages of the new platform into the two-sided market.For an incumbent platform in the two-sided market,it has the advantage of user's scale.Due to the early entry into the market,it already has a certain user scale and a certain level of user dependence.In order to successfully enter the market,entrants must compete with the incumbents for users,accumulate the user numbers,and cultivate users' preference.The first step for the new platform is accumulating users on it.During this period,the effect of the direct network externality is positive so as to attract more users.At the same time,direct network externality enhances user preferences on the it and helps new platforms to retain users.There are many examples of successful entrants into the two-sided market,among them WeChat Pay is a classic example of successfully entering into the third-party payment market.In the market competition stage,the entrant needs to adjust price strategies and services to increase consumer preferences and accumulate consumer numbers of each side.The transaction activities and user scale on the platform increase along with the user preferences going up.The user scales of each side finally influence on the pricing power and profitability of the platform.In this thesis,we build a theoretical model speculating the relatives between the direct network externality and user preferences,and then discuss how these two factors help new platforms enter into the two-sided market.Then we use the data of WeChat Pay which successfully enter into the third-party payment market to conduct empirical tests.First,we estimate the direct network externality of the Alipay and the WeChat Pay respectively.It is found that the direct network externality of the WeChat Pay is significantly larger than the Alipay.The effect of the direct network externality on the WeChat Pay is positive.Then,this thesis estimates the consumer preferences numerical values of the WeChat Pay and measures the mechanism of the platform profits.The results show that: not the expansion of the user scale reduces drives user's direct network externality from positive to negative as researchers agree in the previous literatures,but the per capital transaction volume lead to a decrease in the user's direct network externality,thereby affecting the user scale,total transaction amount and the total profit level of the platform in the platform competition stage.