Pricing Strategies of Electronic B2B Marketplaces with Two-Sided Network Externalities

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1 $17. c IEEE 1 Poceedig of the 5th Aual Hawaii Iteatioal Cofeece o Sytem Sciece HICSS $17. IEEE Poceedig of the 5th Hawaii Iteatioal Cofeece o Sytem Sciece - Picig Stategie of Electoic BB Maketlace with Two-Sided Netwok Extealitie Byugjoo Yoo, Vidyaad Choudhay, Tida Mukhoadhyay Gaduate School of Idutial Admiitatio Caegie Mello Uieity, Pittugh, PA 151 {yoo, eecee, Atact BB electoic commece ha ecome a imotat iue i the deate aout electoic commece. How hould the itemediay chage ulie ad uye to maximize ofit fom uch a maketlace? We aalyze a mooolitic BB maketlace owed y a ideedet itemediay. The maketlace exhiit two-ided etwok extealitie whee the alue of the maketlace to uye i deedet o the ume of ulie, ad alue to ulie i deedet o the ume of uye ad ulie. Whe thee two-ided etwok extealitie exit, we fid that the otimal ice fo uye ad the factio of uye i electoic maket ae deedet o the witchig cot ad the tegth of the etwok effect of oth tye: uye ad ulie. The ame i tue fo the otimal ice fo ulie ad the factio of ulie i electoic maket. I othe wod, the aamete that defie the uye alo affect the otimal ice fo ulie ad the factio of ulie i electoic maket ad ice ea. Ou eult alo oit to ome couteituitie otimal icig tategie that deed o the atue of the iduty eed y the maketlace. 1. Reeach quetio The aid gowth of electoic commece led to high exectatio, ome of which wee too uealitic to hold tue. The tuggle of famou dot-com uch a Amazo.com ad Buy.com i uie-to-coume maket hae cat dout o the futue of electoic commece. While much attetio wa focued o uie-to-coume fim at the outet, fa geate olume of taactio wee coducted i uie-touie maket. Accodig to Foete Reeach, the amout of uie-to-uie BB ale i eeal time that of uie-to-coume BC ale ad will e ee geate i the ea futue. Howee, i the cotext of deigig BB maketlace o the Iteet, thee ae eeal uaweed quetio. How to attact uye ad ulie to BB maketlace? How ca itemediaie extact eeue fom ulie ad uye i the maketlace? May actitioe hae eculated aout thee quetio, ut thee i little academic eeach i thi aea. Some BB maket itemediaie hae uccefully ceated maketlace. Oe commo facto amog them i that, alog with taactio eice, they hae oided ifomatio eice uch a iduty-elated ew eice fo the iduty Citado, coultig eice FeeMaket, ad othe eice. Fo examle, idutyelated ew eice ca attact ulie ad uye ad hel fom a commuity to diemiate ew ifomatio elated to the iduty. Thi, i tu, attact moe uye ad ulie. Such ifomatio elated eice ae aluale to uye ad ulie ieectie of the leel of etwok extealitie. The, the maketlace ca make effot to tafom the commuity ito a cutome ae. A imotat quetio facig itemediaie i how to ice thei eice? How will etwok extealitie affect the tategy of the itemediay? I thi eeach, we tudy the tategie of itemediaie icludig thei icig of eice whe the imact of etwok effect i igificat. Uually etwok extealitie affect a coume' aluatio of a oduct deedig o the ume of comatile oduct eig ued y othe coume. The etwok effect i a maketlace i diffeet i that the alue of a maketlace to a uye deed o the ume of ulie ad ice ea. We dicu the atue of the etwok effect i maketlace i detail i uequet ectio. Thi aticle i ogaized a follow: Sectio iefly eiew eiou tudie elated to BB maketlace. Sectio dicue the aic maketlace model. Sectio 4 dicue the imact of maket coditio o the otimal ice ad leel of aticiatio i electoic maket. Fially, Sectio 5 eet ou cocluio.. Theoetical foudatio Thee ae two mai eefit of electoic BB maketlace. The fit oe i the eed ad efficiecy of taactio ealed y ifomatio techology. Uig adaced ifomatio techology, ulie ad uye

2 $17. c IEEE Poceedig of the 5th Aual Hawaii Iteatioal Cofeece o Sytem Sciece HICSS $17. IEEE Poceedig of the 5th Hawaii Iteatioal Cofeece o Sytem Sciece - ca educe taactio cot. The ecod eefit accue fom the lage ume of aticiat. By igig togethe a lage ume of uye ad elle, electoic maketlace iceae choice. Becaue of the eae of eachig fo ulie i electoic maketlace, uye hae a geate chace of fidig cheae ice o ette taactio coditio. Alo ulie ca fid uye that ette match thei equiemet whe they wat to ell thei oduct. Whe the alue of a oduct deed o the ume of ue, we coide the oduct to exhiit extealitie. The eefit fom haig a lage ume of aticiat ae called oitie etwok extealitie. A a examle, a telehoe i oly aluale if thee ae othe eole with comatile telehoe that a ue wihe to call. I ealie eeach, Katz ad Shaio [8] dicued the tategie fo oduct with oitie etwok effect. They howed how etwok extealitie ca affect the deciio of comaie, eecially thoe elatig to the comatiility of thei oduct to iduty tadad. Byjolfo ad Kemee [] emiically howed that the etwok extealitie of eadheet oftwae ogam ca iceae the ice of thee ogam. I thi ae, the chaacteitic of etwok extealitie of the maketlace ae quite diffeet fom the chaacteitic of etwok extealitie of oduct i eiou tudie. We call the etwok extealitie of oduct oe-ided to diffeetiate it fom the etwok extealitie of the maketlace. Fo each laye, the alue of the maketlace i deedet o the aticiatio of the othe aty. A we ca ee i Fig.1, fo uye i the maketlace, the ume of ulie i the mai coce ad fo ulie, the ume of uye i the mai focu. Sulie1 Sulie Sulie Sulie4 BB Maketlace Itemediay Buye1 Buye Buye Buye4 Buye5 Figue 1: Two-ided etwok extealitie of the maketlace The alue of the maketlace to each laye i iceaed whe he o he ca each fo moe uye o ulie ecaue, with moe uye o ulie, thee i a geate oaility of fidig a ette match o ette offe. O the othe had, the alue of the maketlace deceae fo each whe thee ae moe cometito o he ide. We call thi egatie etwok extealitie ad it i detemied y the aticiatio of the laye ow ide. Wag ad Seidma [1] howed that the aticiatio of moe ulie ca geeate oitie extealitie fo the uye ad egatie extealitie fo othe ulie i a electoic data itechage EDI etwok. I thi model, we oly coide egatie etwok extealitie fo the ulie ide. We aume that thee ae o uly ide cotait, ad theefoe, o egatie etwok extealitie fo the uye' ide. Sule [] illutate the ecoomic imotace of itemediaie ad dicue eeal of the ole they lay: ettig ice ad cleaig maket, oidig liquidity ad immediacy, coodiatig uye ad elle, ad guaateeig quality ad moitoig efomace. Ruitei ad Woliky [] model the matchig oce a a time-coumig eie of aiwie meetig ad itoduce middleme who act a uye o ulie themele ad theefoe ca acceleate the othe aget' each ocee. Bhagaa et al. [] aalyzed the deciio of a itemediay whe thee ae aggegatio eefit fo uye. But they oly coideed the aggegatio eefit fo uye, ot the aggegatio eefit fo ulie, o the egatie etwok extealitie. While thee ae eefit fom joiig electoic maketlace, ome witchig cot alo exit. Whe ulie ad uye joi thee maketlace, they hae to icu ome exee to adat thei cuet ditiutio chael. I eiou Electoic Data Itechage EDI eeach, may tudie examied how to attact ulie ad uye to EDI etwok fom taditioal chael. Riggi et al. [9] howed how to attact ulie to a EDI etwok u y a uye i the eece of etwok effect. Ee though, i at tudie, eeache metioed that etwok extealitie i the maketlace deed o the leel of aticiatio of othe atie, uch a uye to ulie ad ulie to uye, few eeache hae examied cae whee the leel of aticiatio of othe atie affect the alue of the maketlace. I thi eeach, we how how the iteactio etwee the leel of etwok extealitie of two atie, uye ad ulie, affect the leel of aticiatio i electoic maket. We alo examie the icig tategy of a itemediay whe witchig cot ae coideed.. A aic model We aalyze the icig deciio of a ideedet itemediay who ow a electoic maketlace i a iduty. We model two tye of laye i the maketlace: ulie ad uye. Sulie ae fim that wat to ell thei oduct to uye i the iduty which the maketlace ee. Buye ae comaie that

3 $17. c IEEE Poceedig of the 5th Aual Hawaii Iteatioal Cofeece o Sytem Sciece HICSS $17. IEEE Poceedig of the 5th Hawaii Iteatioal Cofeece o Sytem Sciece - wat to uy eouce fom the maketlace. We deote ulie ad uye a ad eectiely. We aume that fim joiig the electoic maketlace ae eithe uye o ulie. Thu, fo examle, if a fim ha te taactio, fou a a ulie ad ix a a uye, it ca e aid that thee i oe uye with fou taactio ad oe ulie with ix taactio aumig uyig ad ellig deciio ae ideedet. I ou model, we aume that the itemediay ow the maketlace, ad i ideedet of ay ulie o uye. The itemediay ojectie i to maximize it ofit fom the maketlace. A a eal wold examle, coide Citado, Ic. which i a ideedet itemediay oidig a maketlace fo ulie ad uye i the cotuctio iduty. The maketlace offe ome ifomatio eice fo ulie ad uye uch a techical uot ad iduty-elated ew eice. Thee eice ceate alue fo ulie ad uye, ad, which ae ot deedet o the ume of ulie o uye. Alo, the maketlace oide aggegatio eefit, e ad e, which ae deedet o the ume of ulie ad uye, ad. Fo examle, whe thee ae moe ulie, uye ae likely to fid lowe oduct ice ad ette matchig ulie. The ame i tue fo ulie. The egatie etwok extealitie fo ulie ae eeeted y e ad thee ae ootioal to the ume of ulie,. A how i the EDI cae y Wag ad Seidma [1], the aticiatio of moe ulie ca geeate egatie extealitie fo ulie i the BB maketlace ice the iceaed cometitio amog ulie educe the ofit of each ulie. To imlify, we aume that the aggegatio eefit to ulie ae ootioal to the ume of uye ad, likewie, the aggegatio eefit to uye ae ootioal to the ume of ulie. Thu, i Eq. 1,, ad ae cotat that eeet the iteity of the etwok effect e, e ad e eectiely. I a maketlace whee the taactio ae executed y eee auctio, the iteity of etwok exteality fo uye i likely to e geate > ecaue the mechaim of eee auctio eciitate the ice cometitio amog ulie. The mai eefit of the eee auctio mechaim ae fo uye i fidig ette offe fom ulie. Ee though thee ae ome eefit fo ulie whe they ca meet moe uye i the maketlace, it i likely that thee eefit i malle tha the eefit diectly fom the eee auctio mechaim fo uye. So, the aticiatio of a additioal ulie i moe aluale to uye tha the aticiatio of a additioal uye to ulie i the maketlace. To the cotay, i a maketlace whee the taactio ae executed y fowad auctio, the iteity of etwok exteality fo ulie i likely to e geate >. Alo, i a maketlace whee oduct ae udiffeetiated ad uye ae moe ice eitie, the cometitio amog ulie i moe itee ad the iteity of egatie exteality will e geate. We omalize ad o that i the factio of ulie i the maketlace elatie to the total ume of ulie i the iduty ad imilaly fo. e, e, e 1 We aume that ulie ad uye ae cuetly uig taditioal ditiutio chael ut ae coideig witchig to the electoic maketlace. I the electoic maketlace, a ee i Fig.1, the itemediay oide a maketlace whee ulie meet uye ad ice ea. Sulie ad uye who ae i the taditioal maketlace ae heteogeeou i tem of the witchig cot of tafeig thei taactio fom the taditioal to the electoic maketlace. We aume that the ulie ad uye x, x ae uifomly ditiuted i, 1 whee eeet o witchig cot ad 1 eeet high witchig cot. Fo examle, uye ad ulie who hae aleady adoted ifomatio techology fo thei ocee will fid it eaie to witch to the electoic maketlace while othe uye ad ulie with a lee degee of ifomatio techology adotio may ecoute geate difficulty of witchig. The difficulty of witchig alo deed o the geeal atue of the iduty eed y the maketlace. Fo examle, if a iduty ha ot deeloed tadadized way of oduct ecificatio, it would e moe difficult fo uye ad ulie i that iduty to tafe to electoic maketlace. We model the witchig cot a x ad x whee, eeet the geeal iduty-leel difficulty of witchig fo ulie ad uye ad x, x eeet the heteogeeity amog idiidual ulie ad uye i tem of thei aility to adat to the electoic maketlace. Thee witchig cot iclude oth the cot of uchaig ad itallig equimet to coect the uie to the electoic maketlace ad the cot ioled i adatig the taditioal uie ocee fo the electoic maketlace. Buye ad ulie ay fee, ad, to the itemediay fo uig it maketlace. Thee fee ae the total amout fo each ulie ad uye to ue the maketlace. The ofit fuctio of ulie ad uye fom joiig the maketlace ae oided i Eq. ad Eq.. u - - x - u - x -

4 $17. c IEEE 4 Poceedig of the 5th Aual Hawaii Iteatioal Cofeece o Sytem Sciece HICSS $17. IEEE Poceedig of the 5th Hawaii Iteatioal Cofeece o Sytem Sciece - Sulie ad uye will aticiate i the maketlace if ad oly if the ofit i oitie a i Eq. 4. Let x ad x e the ulie ad uye that i idiffeet etwee witchig ad ot witchig to the electoic maketlace. Thu we otai the idiffeece equatio tated i Eq. 5 ad Eq. 6. u, u 4 u - - x - 5 u - x - 6 Electoic Maket Sulie Buye Taditioal Maket 1 Eay to tafe E-Maket E-Maket x x Tad-Maket Tad-Maket Difficult to Tafe 1 Figue : Factio of aticiat i electoic maket ad witchig cot A how i Fig., all uye ulie of tye x x le tha x x will witch to the electoic maketlace. Theefoe, the factio of aticiat i electoic maket, of the electoic maketlace ae gie y: x, x 7 The itemediay ited to maximize it ofit y chagig fee to ulie ad uye fo uig it maketlace. The the itemediay deciio olem P1: Fid, i ode to maximize the total ofit of the itemediay Eq. 8 uject to the cotait o the factio of aticiat i electoic maket Eq. 9 ad Eq. 1. max π, 8.t What will e the otimal ice leel ad the otimal leel of aticiat i electoic maket? We examie thee quetio i the followig uectio..1. Iteio olutio The iteio olutio i otaied whe the factio of aticiat i electoic maket ad that maximize the ofit of the itemediay, Eq. 8 i ot ouded y the cotait of the factio of aticiat i electoic maket i Eq. 9 ad Eq. 1. < < 1 11 < < 1 1 Pooitio 1 Iteio Solutio The otimal ice leel, ad the otimal leel of aticiat i electoic maket, which maximize the ofit of the itemediay ae, 4, 4 ad 4. 4 Poof. Fom olig the ofit fuctio of uye ad ulie at the idiffeet oit i Eq. 1 ad Eq. 14, we ca get the ice leel, i tem of the leel of the factio of aticiat i electoic maket, i Eq. 15 ad Eq. 16. u u We utitute thee eult ito the ofit fuctio of the itemediay i Eq. 8. We get the fit ode coditio of the ofit fuctio fo each tye of aticiat i the electoic maket,. dπ d dπ 17 d Uig Eq. 11 ad Eq. 1, aumig the cotait o the factio of aticiat i electoic maket ae ot idig, the otimal leel of the factio of aticiat i electoic maket ae a follow. 18 The the otimal ice to maximize the ofit of the itemediay i a follow

5 $17. c IEEE 5 Poceedig of the 5th Aual Hawaii Iteatioal Cofeece o Sytem Sciece HICSS $17. IEEE Poceedig of the 5th Hawaii Iteatioal Cofeece o Sytem Sciece - 4 The otimal leel of the factio of aticiat i electoic maket with the otimal ice utituted ae tated i Eq.. The ulie ad uye tye ae diided ito two gou of uye ad ulie, thoe who joi the ew electoic maketlace ad thoe who emai i the taditioal maketlace a how i Fig.. 4 Q.E.D. 4 Fo the iteio olutio to hold, the elatiohi amog aamete a i Eq. 1, Eq. ad Eq. hould atify coditio Eq. 11 ad Eq > > 4 - > Fom the otimal olutio of ice leel ad factio of aticiat i electoic maket of ulie ad uye tye,,, i Eq. 19 ad Eq., we ca ee that oth the otimal leel of aticiat i electoic maket, ae iflueced y the aamete that defie the two tye,,,,,,. A a examle, if thee i a eductio i witchig cot fo ulie, thu cauig a iceae i thei factio of ulie i electoic maket, the otimal factio of uye i electoic maket alo iceae ecaue of the idiect effect fom the iceaed ume of ulie though etwok e. Thi ca e ee i Fig.. Mkt Shae Fig : Factio of aticiat i electoic maket with diffeet leel of difficulty of witchig: The chage i the otimal factio of aticiat i electoic maket with diffeet leel of S difficulty of witchig fo ulie fom.17 to ,.,.4,.,.5 Hee, oth the otimal leel of the factio of aticiat i electoic maket ae educed whe thee i highe difficulty of witchig. I the cotuctio iduty, if Iteet techologie ecome wide-ead amog ulie, it will e elatiely eaie fo ulie to aticiate i electoic maketlace ad moe ulie will joi the electoic maketlace. Thi i tu will attact moe uye due to the lage aggegatio eefit eultig fom a iceae i the ume of ulie. Ee though thee i o chage i the iduty aamete fo uye, the factio of uye i the electoic maket i iceaed. I thi model, we wat to coide ad aalyze thee mutual effect etwee ulie ad uye which hae ot ee accouted fo i io liteatue. All the effect of the chage of the aamete o the otimal leel of aticiat i electoic maket, ae taightfowad a exected. The factio of aticiat i the electoic maket of oe tye i alway affected y chage i the coditio of the othe tye though idiect effect. Fo examle, the otimal leel of the factio of ulie i the electoic maket iceae with a iceae i the tegth of the etwok extealitie fo the eithe tye >, >. The egatie etwok extealitie hae a egatie imact o oth the ulie ad uye <, <. Whe moe ifomatio eice ae oided fo eithe tye, the factio of ulie i the electoic maket iceae >, >. Alo, a exected, the otimal leel of aticiat i electoic maket ae lowe whe thee i geate difficulty i witchig fo eithe tye at the iduty leel <, <... Bouday olutio Now we eet ouday olutio which occu whe the factio of aticiat i electoic maket, ae eithe zeo o oe. I othe wod, thee eult aly to the cae whe the cotait o the factio of aticiat i electoic maket i Eq. 9 ad Eq. 1 ae idig. Thee ae eight oile cae whee eithe cotait i tight 1.,,., 1,., < <1, 4. 1, < <1, 5. 1,, 6. 1, 1, 7. < <1,, 8. < <1, 1. 5

6 $17. c IEEE 6 Poceedig of the 5th Aual Hawaii Iteatioal Cofeece o Sytem Sciece HICSS $17. IEEE Poceedig of the 5th Hawaii Iteatioal Cofeece o Sytem Sciece - Pooitio Wheee the alue of ifomatio eice, i oitie, the factio of aticiat i electoic maket, ae alway oitie. Thi i a ey ituitie eult. Wheee it i oile fo the itemediay to oide eefit at o magial cot, it i otimal fo the itemediay to et ice o that ome uye ad ulie ca ue it eice. So fie of the eight cae ae ot feaile: 1.,,., 1,., < <1, 4. 1,, 5. < <1,. The detailed oof i i aedix A. Thee ae thee emaiig cae with ouday olutio whee eithe o i equal to oe. Cae 1: Both maket ae fully coeed 1, 1. Thi i the cae whee oth cotait, Eq. 9 ad Eq. 1, ae idig 1, 1. The fom the idiffeece oit i Eq. 1 ad Eq. 14, we get the otimal ice leel Cae : Buye maket i fully coeed 1, < < 1. I thi cae, the cotait o the factio of uye, Eq. 1, i idig. The we get ice leel i tem of the factio of aticiat i electoic maket leel, With thee ice, lugged ito the ofit fuctio of the itemediay, we ca get the otimal leel of the factio of ulie i the electoic maket dπ fom the fit ode coditio d. The the otimal ice leel fo ulie ad uye ad the otimal leel of the factio of ulie i the electoic maket ae a follow.,, 1 Maket Shae Fig 4: Factio of aticiat i electoic maket at the ouday cae: The chage of otimal leel of aticiat i electoic maket with diffeet leel of the tegth of etwok extealitie fo uye fom to.5. 1,.,.,.15 Hee, the maket of uye i fully coeed Cae at the fit kik of ad. The the maket of ulie i fully coeed Cae 1: Both fully coeed at the ecod kik of. Cae : Sulie maket i fully coeed 1, < < 1. Followig the te i Cae 1, < < 1, the otimal ice leel ad the otimal leel of the factio of uye i the electoic maket ae a follow., 1, We ca ee the otimal leel of aticiat i electoic maket ad the otimal ice leel fo uye ad ulie i Fig. 4 ad Fig. 5. I oth figue, the otimal ice leel ad the otimal leel of aticiat i electoic maket ae kiked at two leel. The fit kik i the oit whee the maket of uye i fully coeed, ad Cae 1, < < 1 alie etwee the fit ad ecod kik. The ecod kik i the oit whee the maket of ulie i fully coeed, ad Cae 1 1, 1 alie. A how i Fig 5, the ice ca alo tu egatie. I the eal wold, thi ca e iteeted a ome uidy o fee eice to hel ulie o uye to aticiate. 6

7 Pice P P Fig 5: Pice leel at the iteio ad ouday cae: The chage of otimal ice leel with diffeet leel of the tegth of etwok extealitie fo uye fom to.5. 1,.,.,.15 Hee, the loe of otimal ice leel ae kiked at the oit whee eithe maket i fully coeed Cae o. The otimal ice leel fo ouday olutio aly. The egatie ice fo ulie ca e iteeted a a uidy. We ummaize the ouday olutio of the factio of aticiat i electoic maket ad ice leel a follow. Cae \ Value < < 1 1 < < Tale 1: Bouday olutio of the leel of the factio of aticiat i electoic maket ad ice leel 4. Imact of maket coditio o otimal tategie Whe thee i a iteio olutio with Eq. 11 ad Eq. 1, we ca ee the elatiohi etwee the aamete ad otimal ice leel. Imact of etwok extealitie o ice leel Otimal ice leel ae diffeet whe the tegth of etwok extealitie i diffeet. Ituitiely, whe the tegth of etwok extealitie i geate, the alue of the maketlace ad the ice ae exected to e highe. But, i ome cae, the otimal ice leel ae lowe with geate tegth of etwok extealitie. The followig ooitio tate the imact of oitie ad egatie etwok extealitie of oth ulie ad uye tye o otimal ice leel. Pooitio Whe the tegth of the etwok extealitie fo ulie i geate, the ice chaged to ulie i highe while the ice chaged to uye i lowe whe the difficulty of witchig ad the alue of eice ae the ame to uye ad ulie,. Likewie, the ame eult alie fo uye. Poof. Becaue thee ae may mixed effect of eeal aamete, the diectio of the chage of otimal ice to the chage i the elatie tegth of etwok extealitie, i amiguou. Howee, whe the difficulty of witchig ad the alue of ifomatio eice ae the ame to uye ad ulie, the chage i, ae uamiguou. The coditio ae tated i Eq. 4.,, >, 4 The fit deiatie of etwok aamete, o otimal ice of ulie ad uye, ad i Eq. ae: } { } {4 4 8 > > } { } {4 4 8 > > Q.E.D. Whe the effect of etwok extealitie fo a tye i geate, the alue of the maketlace to that tye i Poceedig of the 5th Hawaii Iteatioal Cofeece o Sytem Sciece $17. c IEEE 7 Poceedig of the 5th Aual Hawaii Iteatioal Cofeece o Sytem Sciece HICSS $17. IEEE

8 $17. c IEEE 8 Poceedig of the 5th Aual Hawaii Iteatioal Cofeece o Sytem Sciece HICSS $17. IEEE Poceedig of the 5th Hawaii Iteatioal Cofeece o Sytem Sciece - geate. Futhemoe, the ice chaged to that tye will e iceaed >, >. The we may exect that the ice fo the othe tye alo will e highe ecaue of the idiect effect due to two-ided etwok extealitie. But, couteituitiely, the otimal ice fo a tye i lowe whe the tegth of etwok extealitie fo the othe tye i geate <, <. The eao fo thi eult i a follow. The iceae i ha two ooig effect o : 1 The iceae i caue a iceae i ice the uye hae a iceaed aluatio fo the maketlace due to highe. Thi effect iceae the ulie aluatio of the maketlace which die the itemediay to iceae it ofit fom ulie y iceaig. A iceae i iceae the imotace of ice i at of the ofit fuctio of uye. Thi eult ecouage the itemediay to educe to attact moe ulie. The tegth of elatie to detemie which of thee two effect i geate. Secifically, whe i geate tha, the ecod effect domiate ad the itemediay educe whe thee i a iceae i. We deie thee eult aumig that the coditio i Eq. 4 hold. I eal life, the ice fo ulie to ue electoic BB maketlace will e lowe i the eee-auctio o uye-faoed maketlace comaed to that at the fowad-auctio o ulie-faoed maketlace. The eao why uye fao eee auctio ad ulie fao the fowad auctio i that eee auctio mechaim iteifie the ice cometitio amog ulie ad fowad auctio mechaim eale geate cometitio amog uye. Fo examle, Citado, Ic. u a uye-faoed BB maketlace > i the cotuctio iduty uig eee-auctio. The ice to uye fo uig thi maketlace i likely to e highe tha that chaged y othe maketlace that ae ot uye faoed >. Similaly, the ulie i uch a maketlace ae likely to ay a lowe ice comaed to maketlace that ae ulie faoed. I comaio, e- STEEL which i a fowad-auctio aed eutal BB maketlace i the teel iduty, oly chage taactio fee ootioal to the taactio amout to ulie while uye ay othig. We deie ome couteituitie eult aout the otimal ice leel with diffeet leel of egatie etwok extealitie. Pooitio 4 Thi ooitio i aout the imact of chage i the tegth of the egatie extealitie of ulie ide o the otimal ice leel of the maketlace. 1 Whe the tegth of etwok extealitie fo uye i geate tha that fo ulie > the the ice fo ulie uye i highe lowe if the tegth of the egatie extealitie due to cometitio amog ulie iceae. Whe the tegth of etwok extealitie fo uye i malle tha that fo ulie < the the ice fo ulie uye i lowe highe if the tegth of the egatie extealitie amog ulie iceae. Fom the fit deiatie of the aamete of egatie etwok extealitie o the otimal ice, a i Eq. 19, we ca ee thee omewhat couteituitie eult. We may exect that, ecaue of the geate egatie etwok extealitie amog ulie ad the eultig egatie effect o the aluatio of ulie ad uye, the ice fo ulie ad uye will alway e lowe. Howee, whe > the aticiatio of ulie i moe aluale to uye tha that of uye to ulie, the ice fo ulie i highe ad the ice fo uye i lowe whe iceae. The eao i a follow. Thee ae two ooig effect tated i 1 ad elow. Coide the itemediay otimal ice whe the egatie etwok effect i mall a i the left egio of Fig. 6 ad whe ulie' aticiatio i moe aluale > Cae. 1 A dicued eiouly, whe >, the itemediay lowe to ecouage the aticiatio of ulie ad aie elatiely. Pice P P Fig 6: Pice leel with diffeet leel of egatie etwok extealitie: The chage of otimal ice with diffeet leel of egatie etwok extealitie fom to 1. 1,.,.6,. Hee, the diffeece etwee ice i educed whe the tegth of egatie etwok extealitie iceae. 8

9 $17. c IEEE 9 Poceedig of the 5th Aual Hawaii Iteatioal Cofeece o Sytem Sciece HICSS $17. IEEE Poceedig of the 5th Hawaii Iteatioal Cofeece o Sytem Sciece - Howee, whe the tegth of the egatie etwok effect iceae, thee i a eductio of the alue of etwok extealitie ecaue the iceaed egatie etwok extealitie offet the alue of the oitie etwok extealitie o oth the ide of ulie ad uye. So, the icetie fo the itemediay to uidize ulie y educig the ice chaged to ulie i educed. Thi caue the itemediay to deceae the uidy i the fom of the educed ice to ulie, leadig to a iceae i ad a eductio i. The iceae i caue a eductio i ulie aluatio of the maketlace which ecouage the itemediay to educe the ice chaged to ulie. Whe >, the fit effect domiate ad the fim iceae. I the examle of Citado, which i a eee-auctio aed, uye-faoed maketlace >, if thee ae geate egatie effect to ulie fom haig moe of thei cometito iceae i, the itemediay hould chage moe fo ulie. Thi eult eem couteituitie ecaue the alue of the maketlace i educed to ulie with thi egatie effect. The eao i a follow. Due to the geate egatie effect, the effect of oitie etwok extealitie i lowe. So, fo the itemediay, the icetie to lowe the ice fo ulie to attact them i educed whe the oitie effect of etwok extealitie i educed. Whe the maketlace i eee-auctio aed, uye-faoed maketlace >, the otimal ice fo ulie i highe ecaue the ice-educig effect fom the educed alue of the maketlace to ulie i malle tha the iceiceaig effect fom the educed icetie fo the itemediay to educe the ice fo ulie. Imact of ifomatio eice leel o ice leel Otimal ice leel ae diffeet with chage i the leel of ifomatio eice,. Ituitiely, whe the alue of ifomatio eice leel i highe, the alue of the maketlace ad the ice ae exected to e highe. But, i ome cae, the ice leel ae lowe with highe ifomatio eice leel. The imact of ifomatio eice leel of oth ulie ad uye tye o otimal ice leel i tated i the followig ooitio: Pooitio 5 The imact of ifomatio eice leel o the otimal ice leel of the maketlace i: 1 Whe the alue of the ifomatio eice fo ulie, uye,, i geate, the ice chaged to the ulie the uye,, i highe. a Whe the alue of the ifomatio eice fo uye, ulie,, i geate, the ice chaged to ulie the uye,, i lowe if the tegth of etwok extealitie fo uye ulie i geate tha that fo ulie uye, > >. Whe the alue of the ifomatio eice fo uye, ulie,, i geate, the ice chaged to ulie the uye,, i highe if the tegth of etwok extealitie fo the uye ulie i malle tha that fo ulie uye, < <. Fom the fit deiatie of the eice leel, o the otimal ice, a i Eq., thi ooitio ca e eaily oe. Whe the alue of the ifomatio eice fo a tye i geate, the alue of the maketlace to that tye i geate. Alo, the ice chaged to that tye will e iceaed >, >. The we may exect that the ice fo the othe tye alo will e highe ecaue the geate alue of oe tye iceae the alue of the othe tye y idiect effect. But, couteituitiely, the otimal ice fo a tye i lowe whe the alue of the ifomatio eice of the othe tye i geate if the tegth of etwok extealitie of the tye i geate tha that fo the othe tye. The eao fo thi eult i a follow. The iceae i ha two ooig effect o : 1 The iceae i caue a iceae i ice the uye hae a iceaed aluatio fo the maketlace due to highe. Thi iceae the ulie aluatio of the maketlace which die the itemediay to iceae it ofit fom ulie y iceaig. A iceae i foce the itemediay to educe to iceae to maximize it ofit y maiulatig the ize of ad. Secifically, whe i geate tha, the ecod effect domiate ad the itemediay educe. Fo examle, whe moe ifomatio eice ae oided fo ulie, moe ulie joi the maketlace ad the itemediay ca chage highe ice to ulie. But the itemediay hould caefully coide the icig deciio fo the ice chaged to uye. I the eee-auctio aed, uye-faoed maket >, the aticiatio of ulie i moe imotat tha the aticiatio of uye. Whe moe ifomatio eice fo uye ae oided, the alue of the electoic maketlace i geate fo ulie ecaue of the idiect effect fom haig moe uye i the maketlace. But y educig the ice fo ulie ad attactig moe ulie to the maketlace, the ofit fo the itemediay ca e iceaed. 9

10 $17. c IEEE 1 Poceedig of the 5th Aual Hawaii Iteatioal Cofeece o Sytem Sciece HICSS $17. IEEE Poceedig of the 5th Hawaii Iteatioal Cofeece o Sytem Sciece - Imact of witchig cot o ice leel Otimal ice leel ae diffeet with the diffeet leel of difficulty of witchig,. Ituitiely, whe witchig to electoic maketlace i moe difficult, the alue of the maketlace ad the ice of it ae exected to e lowe. But, i ome cae, the ice leel ae highe with highe difficulty of witchig. The followig i the ooitio aout the imact of witchig difficulty of oth ulie ad uye ide o otimal ice leel. Pooitio 6 The imact of witchig cot o the otimal ice leel of the maketlace ae: 1 Whe the tegth of etwok extealitie fo uye i geate tha that fo ulie >, the ice fo ulie uye i highe lowe if the difficulty of witchig fo ulie o uye, ad, iceae. Whe the tegth of etwok extealitie fo uye i malle tha that fo ulie <, the ice fo ulie uye i lowe highe if the difficulty of witchig fo ulie o uye, ad, iceae. Fom the fit deiatie of the witchig cot aamete, o the otimal ice, a i Eq. 19, thi ooitio ca e eaily oe. We may exect that, ecaue of the highe difficulty of witchig, the electoic maketlace ecome le attactie ad the ice fo ulie ad uye would e lowe if it i moe difficult fo ulie to witch to the electoic maketlace. Howee, whe > the aticiatio of ulie i moe aluale to uye tha that of uye to ulie, the ice fo ulie i highe ad the ice fo uye i lowe whe o iceae. The eao i a follow. Pice P P S Fig 7: Pice leel with diffeet leel of the difficulty of witchig: The chage of otimal ice with diffeet leel of the difficulty of witchig fo ulie fom.17 to 1.5 1,.,.4,.,.5 Hee, the diffeece etwee ice i educed whe thee i highe difficulty i witchig. Thee ae two ooig effect: 1 Coide the itemediay otimal ice whe the difficulty of witchig to the electoic maketlace i mall. A dicued eiouly ad a how i Fig. 7, whe >, the itemediay lowe ad aie to attact moe ulie to the maketlace ice the aticiatio of ulie i moe aluale to uye tha that of uye to ulie. Howee, whe the difficulty of witchig iceae, thee i a eductio i the alue of etwok extealitie ecaue the iceaed difficulty of witchig educe the effect of etwok extealitie y educig the otimal ume of ulie ad uye who aticiate i the maketlace,. So, the icetie fo the itemediay to uidize ulie whoe alue of joiig the maketlace i highe, y educig the ice chaged to ulie, deceae. Thi caue the itemediay to deceae the uidy i the fom of the educed ice to ulie, leadig to a iceae i ad a eductio i. The iceae i o caue a eductio i ulie aluatio of the maketlace which ecouage the itemediay to educe the ice chaged to ulie. Whe >, the fit effect domiate ad the itemediay iceae. We ummaize the ooitio dicued i ectio 4. Paamete Iceae Aumtio - -, - whe > - whe < whe < - whe > whe < - whe > - whe < - whe > - whe > - whe < Tale : Summay of ooitio of ectio 4 Imact of aamete o ice leel i ouday cae I ouday cae, ome of the ooitio o the imact of aamete i the cae of iteio olutio hold 1

11 $17. c IEEE 11 Poceedig of the 5th Aual Hawaii Iteatioal Cofeece o Sytem Sciece HICSS $17. IEEE Poceedig of the 5th Hawaii Iteatioal Cofeece o Sytem Sciece - ut othe do ot hold. The mai eao why thee diffeece aea i a follow. Oce eithe ide of the makelace o i fully coeed, the icetie to educe ice fo the tye with a highe alue of aticiatio uye if >, ulie if > to attact the tye doe ot exit ay moe. Fo examle, whe uye' maket i fully coeed 1, <1, the ice fo uye iceae whe the iteity of etwok exteality o ulie iceae i the cae of ouday olutio while the ice fo uye deceae i the iteio olutio. Becaue aleady all uye hae aticiated i the maketlace 1, thee i o moe eed fo the itemediay to educe the ice chaged to uye to attact them. 5. Cocluio Ou theoetical aalye hae how that the exitece of etwok extealitie ad the mutual effect of the uye maket o the ulie maket ad ice ea affect the otimal icig tategy ad otimal leel of aticiat i electoic maket of BB itemediaie. Fom ou model, we deie the icig tategy that a ideedet itemediay ca ue to maximize it ofit. How much hould the itemediay chage? Baed o ou aumtio, the factio of aticiat i electoic maket a well a the ice chaged fom the two tye: ulie ad uye i the electoic maketlace ae deedet o the aamete that defie the two tye. I othe wod, a imact o the coditio of oe tye alo affect the factio of aticiat i electoic maket ad ice leel of the othe tye ecaue of the exitece of two-ided etwok effect. Alo, whe the elatie tegth of etwok extealitie of a cetai tye i geate, that tye ay a highe ice to the BB itemediay. Thu the tye, eithe uye o ulie, to whom the etwok extealitie o aggegatio eefit i moe imotat comaed to the othe tye, would ay moe to the BB maketlace ad exloit the cometitio amog the othe tye. Whe the ifomatio eice fo a tye i moe aluale, the ice chaged to that tye i highe. But the imact of the diffeet leel of ifomatio eice o the ice chaged to the othe tye deed o the elatie tegth of the etwok effect. Fo examle, i eee-auctio aed, uye-faoed maketlace, we ca exect that the ice chaged to ulie will e highe whe moe ifomatio eice ae oided fo uye leadig to geate aticiatio of the uye. But, couteituitiely, ice the alue of aticiatio of ulie to the electoic maketlace i moe aluale tha the aticiatio of uye i a uye faoed maketlace, theefoe the itemediay hould lowe the ice chaged fom ulie to attact moe ulie. Ou eult icludig thi examle ugget that itemediaie hould hae a oade iio i deigig thei maketlace to iceae thei ofit i electoic maketlace. I thi eeach, we aume a mooolitic ad ideedet itemediay with a igle eiod model. We ited to exted thi aalyi to a dyamic model with multile eiod. We alo hoe to aalyze a duooly model which icooate cometitio etwee itemediaie i electoic maket i ou futue eeach. Due to ome chaacteitic of the BB maketlace uch a etwok effect, it i oile that, i cetai egmet, oly oe maketlace will uie. I othe egmet, the emegece of a domiat maketlace i likely. I fiacial maket, fo itace, a igle exchage ted to eceie mot of the taactio ad ofit. I uch cae ou moooly model i a cloe aoximatio, ad we thik the ooitio deeloed i thi model ae alicale to uch eal-wold ituatio. Alo, we hoe to aalyze diffeet owehi tuctue of BB maketlace which iole ulie ad uye who ow the maketlace. Fom thee exteio, we exect to ooe model of BB maketlace that ae owed y ulie o uye ad to comae the eult o the ice leel ad factio of aticiat i electoic maket to the eult of the cuet model of a ideedet itemediay. 6. Refeece [1] Bako, J.Y. ad Nault, B., Owehi ad Ietmet i Electoic Netwok, Ifomatio Sytem Reeach, 8, [] Byjolfo, E. ad Kemee, C.F., Netwok i micocomute oftwae: A ecoometic aalyi of the eadheet maket, Maagemet Sciece, 4, [] Bhagaa, H.K., Choudhay, V. ad Kiha, R., Picig ad Poduct Deig: Itemediay Stategie i a Electoic Maket, Iteatioal Joual of Electoic Commece, 5, [4] Choudhuy, V., Stategic Choice i the Deelomet of Iteogaizatioal Ifomatio Sytem, Ifomatio Sytem Reeach, 8, [5] Ehe, S. ad Zaf, P., The Iteet Buie-to-Buie Reot Bea&Ste Reot, [6] Foete Reeach Ic.., emaketlace Will Lead US Buie ecommece To $.7 Tillio I 4 Pe Releae, Fe 7,. [7] Kala, S. ad Sawhey, M., BB e-commece hu: Towad a taxoomy of uie model, Haad Buie Reiew, May-Jue [8] Katz, M.L. ad Shaio, C., Netwok Extealitie, Cometitio, ad Comatiility, The Ameica Ecoomic Reiew, 75, [9] Riggi, F.J., Kieel, C.H. ad Mukhoadhyay, T., The Gowth of Iteogaizatioal Sytem i the Peece of 11

12 1 Netwok Extealitie, Maagemet Sciece 4, [1] Ruitei, A. ad Woliky, A., "Middleme", Quately Joual of Ecoomic, 1:, Aug 1987, PP [11] Sule, D.F., "Maket micotuctue ad itemediatio," Joual of Ecoomic Peectie, 1:, Summe 1996, PP [1] Wag, E. ad Seidma, A., Electoic Data Itechage: Cometitie ad Stategic Imlemetatio Policie, Maagemet Sciece 41, [1] Wie, R. ad Moio, D., Beyod the Exchage: The Futue of BB, Haad Buie Reiew No-Dec, A Poof fo ifeaiility of zeo factio of aticiat i electoic maket, Poof. A we kow, fo the ulie ad uye at the idiffeece oit,, the ice i equal to the eefit fom joiig the itemediay maket. Thu the ice leel ca e how i tem of the otimal leel of aticiat i electoic maket. x u e - e - x x u e - x - - The ofit fuctio of the itemediay ca e how a follow. π The if we diffeetiate the ofit fuctio y the factio of aticiat i electoic maket of ulie o uye ad ole the fit ode coditio, we ca ee that the otimal leel of aticiat, ae alway geate tha zeo i electoic maket i Eq. 5 ad Eq. 6. So we ca ee that, a fa a the ifomatio eice leel, ae oitie, the otimal leel of the aticiat i electoic maket hould e alway oitie. d dπ 5 Sutituted ito π equatio d d π > d dπ 6 Sutituted ito π equatio d d π > Q.E.D. Poceedig of the 5th Hawaii Iteatioal Cofeece o Sytem Sciece $17. c IEEE 1 Poceedig of the 5th Aual Hawaii Iteatioal Cofeece o Sytem Sciece HICSS $17. IEEE

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