Barriers to network-specific investment

Antoine Martin and Michael Orlando ()

Review of Economic Dynamics, 2007, vol. 10, issue 4, 705-728

Abstract: We examine incentives for network-specific investment and consider the implications for network governance. We model a two-sided market in which participants making payments over a network platform can invest in a technology that reduces the marginal cost of using the platform. A network effect results in multiple equilibria -- either all agents invest and use of the platform is high or no agents invest and use of the platform is low. The high-use equilibrium can be implemented if commitment is feasible. When the platform cannot commit to usage fees, investment in the platform-specific technology will be held-up, thus implementing the low-investment equilibrium. As a result, governance structures necessary to achieve commitment will be preferred to those necessary merely to achieve coordination. For example, mutual ownership by users of a network platform may emerge where users face risk of ex-post renegotiation. Such a governance structure will also be sufficient to avoid low investment attributable to the network effect. (Copyright: Elsevier)

Keywords: Network; Hold-up; Commitment; Two-sided market; Payments (search for similar items in EconPapers)
JEL-codes: E59 G29 L14 L22 (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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DOI: 10.1016/j.red.2007.03.001

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