Barriers to network-specific investment |
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Authors: | Antoine Martin Michael J Orlando |
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Institution: | aFederal Reserve Bank of New York City, Department of Research, New York City, NY, USA;bEVOLVE24, LLC, St. Louis, MO, USA |
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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. |
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Keywords: | Network Hold-up Commitment Two-sided market Payments |
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