Disentangling Positive and Negative Externalities on Two-Sided Markets: the eBay Case

This paper proposes an inductive study of the intermediation strategy followed by a two-sided platform when classical positive network externalities are countered by negative intra-group externalities. By analyzing the recent evolution of eBay in Belgium and relying on a grounded theory methodology, the paper explains how the possible growing heterogeneity within one side of the market may have strong consequences in terms of negative intra-group externalities. In particular, the study shows that when opposite – i.e. negative and positive – externalities simultaneously occur, the platform must make a strategic choice as whether to exclusively internalize the positive inter-group externalities or to internalize also part of the negative intra-group externalities. Further, it argues that the recent literature on two-sided markets, by focusing on static inter-group externalities and considering intra-group externalities as a minor phenomenon, misses some important aspects of managing such intermediating platforms.