In many transaction two-sided markets, an “aggregator” platform (e.g., Google Shopping) gives buyers access to the sellers of a competing “source” platform (e.g., Amazon Marketplace). This creates intertwined network effects (INE) between them. Despite the prevalence of this phenomenon, including multiple prominent mergers, little is known about it. Using a theoretical model, I show that while INE increase consumer surplus, they reduce seller surplus if the platforms are sufficiently differentiated for sellers, and increase it otherwise. In presence of INE, a non-consolidating merger harms consumers if the network effects they enjoy are sufficiently low, and vice versa. If the platforms are sufficiently homogeneous to sellers, the merger reduces their surplus. I validate the model empirically by exploiting two cases in which classified ads platforms introduced INE: Finn/Nettbil and Adverts/DoneDeal. Using event study designs, I show that INE caused an increase in the number of users in the aggregator. I discuss the implications of the findings for merger control and asymmetric interoperability policies.

I study the effect of competition on innovation incentives and consumer surplus in digital markets with a focus on disruptive innovation. If a firm wins a disruptive innovation contest, it creates a new market for a network good that it dominates and its rivals enter it. The new market cannibalizes revenues from one of the markets in which all firms compete prior to innovation. Asymmetric obligations such as data sharing pose a static vs dynamic consumer surplus trade-off: they increase consumer surplus in each market, but they stifle innovation, thus reducing the expected consumer surplus from a new market. However, low asymmetric obligations lead to excessive R&D efforts that hurt consumers through market cannibalization. Hence, the consumer-surplus-maximizing level of asymmetric obligations decreases over the intensity of creative destruction, i.e., the strength of market expansion in the new market vis-à-vis its cannibalization of an old one. The number of firms has a non-monotonous, a priori ambiguous impact on innovation and consumer surplus that depends on the strength and signs of two effects: i) the nature of firms’ R&D investments (strategic complements or substitutes) and ii) whether the number of firms increases or decreases the expected loss from a rival’s cannibalization.