Volume 9, Issue 4

Platform businesses add value by facilitating interactions between customers who are attracted in part by network externalities. Two-sided platform businesses with low costs of reversing participation status have become more important with the rise of the Internet. This essay is concerned with new businesses of this sort and the initial critical mass hurdle that they generally seem to face. In a very general model, we show how this hurdle depends on the nature of network effects, the dynamics of customer behavior, and the distribution of customer tastes. Weak, plausible assumptions about adjustment processes imply that platforms must get a sufficient number of members of both sides on board to launch successfully.

Although mobile payments are increasingly used in some countries, they have not been adopted widely in the United States so far, despite their potential to add value for consumers and streamline the payments system. We summarize short-term and long-term benefits from mobile payments, and analyze the economic framework of that market. Both demand-side and supply-side barriers contribute to the lack of adoption of mobile payments. We contrast mobile payments at the retail point of sale in the U.S. with other countries’ experiences and with examples of successful payment innovations in the U.S. Conditions that have facilitated some success in other countries and in other U.S. innovations are not present in the mobile payments market. On the demand side, consumers and merchants are well served by the current card system and face a low expected benefit-cost ratio, at least in the short run. On the supply side, low market concentration and strong competitive forces of banks and mobile carriers make coordination of standards difficult. Furthermore, mobile payments are characterized by a network effects problem: consumers will not demand them until they know that enough merchants accept them, and merchants will not implement the technology until a critical mass of consumers justifies the cost of doing so. We present some policy recommendations that the Federal Reserve should consider.

This paper analyzes the relationship between a national regulator, an incumbent and a local government in a context where investment in a new network has to be undertaken. In the light of the recent debates on the competition between private firms and local governments, we analyze the limits to be put on the local public intervention in these markets. We show that banning local government intervention can be welfare-enhancing either in the presence inter-districts externality or with asymmetric information or in case of conflicting objectives between the regulator and local governments.

The rapid growth of online search and its centrality to the ecology of the Internet pose important questions: why is the search engine market so concentrated, and will it evolve towards monopoly? What implications does this concentration have for consumers, search engines, and advertisers? Does search require regulation, and, if so, in what form? This paper supplies empirical and theoretical material with which to examine these questions. In particular, we (a) show that the already large levels of concentration are likely to continue; (b) identify the consequences, negative and positive, of this outcome; and (c) discuss the regulatory interventions that policy-makers could use to address these.