Two-sided social networks the impact of network effects on strategic differentiation
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- Master Thesis 
In this thesis, we examine the presence of direct network effects in two-sided markets. Online social networks like Facebook are examples of firms which exhibit both direct and indirect network effects. These effects have important implications for firms’ incentives to strategically differentiate. While the literature on each type of network effect is extensive, studies of firms who exhibit both these characteristics are few. We survey the literature on direct network effects and two-sided markets separately. We then add to the literature by presenting a Hotelling model with endogenous location where both types of network effects are present. We present two versions of the model, a one-sided duopoly model with direct network effects, and a two-sided model with direct network effects and duopoly competition on one side. We find that both direct and indirect network effects incentivize the firms to differentiate less, implying fiercer competition.