1. 10 Two-sided Platforms 1
Aaron Schiff
ECON

2. Introduction
In this topic we will study a special type of network known as a two-sided network or platform.
Objectives of this lecture: Understand the nature and features of two-sided platforms, some aspects of two-sided business strategy, and the demand for a platform.

3. Two-Sided Networks
In a two-sided market, a firm provides a platform that serves two distinct groups of consumers and facilitates some kind of exchange, communication, or interaction between the groups.
Previously we called this an indirect network effect.
Microsoft Windows
Software Developers
PC Users

4. Examples Market/Industry Consumers Type 1 Type 2
Videogame platforms e.g. Playstation
Game players
Game developers
Auction websites
Auction buyers
Auction sellers
Credit cards
Cardholders
Merchants
Shopping malls/websites
Shops
Document publishing (e.g. Adobe Acrobat)
Document authors
Document readers
Internet backbones
Web surfers
Websites
Dating agencies/websites
Males
Females
Employment websites
Job seekers
Employers

5. Two-Sided vs One-Sided
In two-sided networks, there are two consumer groups that the firms can distinguish.
Implication: Different prices can be charged to the two groups.
In ‘one-sided’ networks, no such distinction is possible.
E.g.: networks, instant messaging, telephone networks.
Doing business in two-sided network markets is more complex, because firms must consider the interaction between the two sides of the market when choosing their business strategies.

6. More Than Two Sides In fact, platforms may have more than two ‘sides’.
Internet advertising platforms have three sides:
Advertisers
Content producers (websites)
Content viewers
Advertising platforms use information about website content and viewer preferences to try to display the ads that people are most likely to click on.
We’ll stick with two sides for simplicity.

7. Features of Two-Sided Networks
Two-sided networks create value by bringing together both sides of the market.
Must get both sides ‘on board’ to provide a valuable service.
Many costs of production are likely to be joint costs of serving both types that cannot be separated.
E.g. the cost of developing a job search website cannot be attributed to either job seekers or job advertisers separately.
Thus the relationship between prices and costs is less clear than in other markets.
Network effects may be very strong.
The value of the platform comes directly from its ability to bring the two groups together, and the larger the groups, the more valuable the platform is likely to be.

8. Features of Two-Sided Networks
In most cases, skewed pricing structures are observed in two-sided markets: One side pays a high price and the other side pays a low price.
Market/Industry
Consumers
High Price
Low Price
Videogame platforms
Developers
Players
Auction websites
Auction sellers
Auction buyers
Job search websites
Job advertisers
Job seekers
Adobe Acrobat
Authors
Readers
Computer operating systems
Computer users

9. Features of Two-Sided Networks
Terminology:
Price level: The total price charged to the two sides.
Price structure: The split of the price level across the two sides.
A key feature of two-sided markets is that the price structure (as well as the price level) matters for the usage and profits of the platform.
Platform businesses must not only choose the overall price level, but how to divide this price across the two sides.

10. How Two-Sided Platforms Create Value
Two-sided platform businesses can be separated into two general types:
Passive platforms
These create the ability for the two types of consumer to ‘meet’ and interact, but do not create these interactions directly.
Examples: Videogame platforms, Adobe Acrobat, Operating systems, Online auctions, Credit cards.
Active platforms
These use some kind of ‘matching technology’ to actively suggest or create interactions between the two sides.
Examples: Job search websites, Dating websites, Real estate agents.

11. How Two-Sided Platforms Create Value
What makes a two-sided platform valuable to its users?
Reduced transaction costs: Make it easier / cheaper for the two sides to find and transact with each other, e.g. online auctions.
Use information about users on the two sides to generate better matches between individuals, e.g. job search sites.

12. Two-Sided Networks and the Internet
Two-sided markets existed before the Internet (credit cards, shopping malls, etc).
Many two-sided platforms are basically information processing and distribution platforms.
Examples: Online auctions, online dating, job search.
The Internet and database systems reduce costs of collecting and disseminating information.
This has helped to make matching service businesses (active platforms) more profitable.
Many traditional matching service businesses are moving online due to the lower costs.

13. Two-Sided Networks and the Internet
The Internet has also provided a new environment for passive platforms to exist:
Provides a convenient mechanism for consumer types to find each other, e.g. auction websites, Adobe Acrobat.
Two-sided platforms can also come from the vertical disintegration of an industry.
Companies like IBM used to sell complete hardware + operating system + software packages.
Microsoft Windows provides a platform that allows separation of hardware and software vendors.

14. Pricing Strategies
There are two general pricing strategies that can be used by two-sided platforms:
‘Subscription’ fees
Charge a one-off joining fee to access the platform, independent of the level of usage.
Example: Adobe PDF.
Success fees / usage charges
Charge a fee each time a successful ‘match’ is made between the two sides.
Example: Real-estate agents, online auctions.

15. Pricing Strategies
To charge success fees, the firm must be able to monitor when successful matches occur.
E.g. online auctions, real estate agents.
Success fees are more feasible for active platforms.
On the other hand, subscription fees may discourage users when the network is small.
Subscription fees make users care about expected future network size.
Leads to greater importance of expectations and network effects / coordination problems.

16. Pricing Strategies
As well as choosing between subscription fees and success fees, firms in two-sided network markets face relatively complex pricing decisions.
Two key problems:
Getting both sides ‘on board’
Choosing the appropriate price structure across the two sides to maximise profits.

17. Getting Both Sides ‘On Board’
A two-sided network is only valuable to consumers if it is able to attract both sides of the market.
This may explain why such firms sometimes charge a zero or even negative price to one side
With sufficient incentives, one side of the market will join even if they have pessimistic expectations about how many of the other type will join.
Firms can then cover the losses by charging a high price to the other side of the market.

18. Choice of Price Structure
As well as getting both sides on board, the choice of price structure will affect the total volume of interactions on the platform.
The number of interactions is proportional to the product of the number of consumers of the two types using the platform.
Depending on price elasticities on the two sides of the market, firms may increase profits by choosing an asymmetric price structure compared to a symmetric structure.
Example: Cut price on one side leads to a big increase in demand on that side, which increases willingness to pay of users on the other side of the market that more than offsets any revenue losses from the price cut.