Platform

July 6, 2022 | By Tom Danowski

Platform

Two-sided markets, also called two-sided networks, are economic platforms having two distinct user groups that provide each other with network benefits. The organization that creates value primarily by enabling direct interactions between two (or more) distinct types of affiliated customers is called multi-sided platform (MSP). Two-sided networks can be found in many industries, sharing the space with traditional product and service offerings. Example markets include credit cards, composed of cardholders and merchants; HMOs (patients and doctors); operating systems (end-users and developers); yellow pages (advertisers and consumers); video game consoles (gamers and game developers); recruitment sites (job seekers and recruiters); search engines (advertisers and users); and communication networks, such as the Internet. Examples of the well known companies employing two sided markets include such organizations as American Express, eBay, Facebook, Mall of America, Match.com, Monster.com, Sony, Skype, Google and others. Benefits to each group exhibit demand economies of scale. Consumers, for example, prefer credit cards honored by more merchants, while merchants prefer cards carried by more consumers. They are particularly useful for analyzing the chicken-and-egg problem of standards battles, such as the competition between VHS and Beta. They are also useful in explaining many free pricing or “freemium” strategies where one user group gets free use of the platform in order to attract the other user group. Two-sided markets represent a refinement of the concept of network effects. There are both same-side and cross-side network effect. Each network effect can be either positive or negative. E.g. positive same-side network effect is end-user PDF sharing or player-to-player contact in PlayStation 3 and negative same-side network effect appears when there is competition between suppliers in online auction market or dates on Match.com. The concept of network effects were conceived independently by Geoffrey Parker & Van Alstyne (2000,2000, 2005) to explain behavior in software markets and Rochet & Tirole (2001,2003) to explain behavior in credit card markets. The first known peer-reviewed paper on interdependent demands was published in 2000. Multi-sided platforms exist because there is a need of intermediary in order to match both parts of the platform in a more efficient way. Indeed this intermediary will minimize the overall cost, for instance, by avoiding duplication, or by minimizing transaction costs. This intermediary will make possible exchange that would not occur without them and create value for both sides. Two-sided platforms, by playing an intermediary role, produce certain value for the both users (parties) that are through it interconnected, and therefore those sides (parties) may both be evaluated as customers (unlike traditional seller-buyer dichotomy).

Author

Tom Danowski