Janusz Ordover, Apr 19, 2007
A freshman student in economics or a Nobel prize-winning macroeconomist who has lately stumbled across a journal or two in industrial organization economics may be somewhat perplexed or confused by many references to two-sided markets. Surely, is it not the case that all markets have two sides, namely buyers and sellers? Consequently, to the uninitiated, the concept of a two-sided market offers little, if any, additional analytical insight. Some of that confusion is perhaps dispelled by a more informative description, namely: markets with two-sided platforms. So for the rest of this paper, we shall forget about two-sided markets and speak of two-sided platforms (2SP) and of markets in which these 2SPs compete. Professors David Evans and Richard Schmalensee (hereinafter E&S), who have done more than most of the thinking about the economics of 2SPs and advocating the importance of the idea to other academics, lawyers, policymakers, and business people, offer a highly accessible survey of the state of play in their excellent contribution to this volume. It is important to recognize that, perhaps without knowing so, economists have studied 2SPs for quite some time (i.e., way before the term was invented) as have competition authorities and the courts. And, of course, business people, who generally are ahead of theoreticians in such matters, have also intuitively understood the specific pricing and marketing challenges that have to be solved in order to launch a 2SP and make it prosper. These challenges arise because (by definition) a 2SP links two (or more) distinct groups of consumers whose demands are interrelated in that each group confers (perhaps up to a point) a positive external benefit on the other. These effects are generally referred to as indirect network effects, in distinction to more standard network effects that realize themselves among the same customer group. When there are indirect network effects, a business strategy that stimulates demand on side A of the platform will, when properly implemented, stimulate demand on side B of the platform, which in turn creates a positive feedback to side A, and so on. Because of this interdependence, a 2SP entrepreneur must solve two problems: first, how to get both sides on board and second, how to structure prices to the two sides.
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