Strategies for Two Sided Markets

Abstract

When markets have different types of users that attract one another, more demand from one group can spur additional demand from the matched group in a virtuous cycle. These effects are often present in platform markets. Examples include application developers/users, credit card merchants/cardholders, and dating sites for men/women. Network effects in these two-sided markets significantly affect prices, competition, and industry concentration. Prices generally fall for the group that is the stronger attractor. Winner-take-all markets can arise depending on the strength of these network effects, economies of supply, specialization, and multihoming. Finally, when users of one platform overlap users of another, there is an opportunity for "platform envelopment" where one platform swallows a competitor. Bundling features that attract one group of the competitor's users can bring along the matching group.

Keywords: two sided markets, network effects, winner take all, multihoming, platforms, envelopment

JEL Classification: D4, D71, H23, K21, L11, L12, M21