Author(s)
Feng Zhu
Source
NET Institute Working Paper #08-20, September 2008
Summary
This paper examines social networks’ incentives to establish compatibility under fee and ad-sponsored business models.
Policy Relevance
The market of internet advertising is a multi-billion dollar industry. This paper provides key information regarding ad-sponsored business models that have begun to dominate this industry.
Main Points
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This paper finds that, when networks operate using fee-based business models, they have no incentives to be compatible as profits would be driven to zero by intense price competition with compatibility. In contrast, when using ad-sponsored business models, networks may have incentives to be compatible, provided that their membership prices are bounded by zero and their installed bases have similar prices.
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This paper also looks at the competition between two ad-sponsored networks in the presence of direct network effects on the user side and focus on compatibility decisions.
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This paper suggests that firms’ business models may be an important determinant of their decisions to form strategic alliances.
