Two-Sided Markets

INDIAN INSTITUTE OF TECHNOLOGY ROORKEE
INFORMATION SYSTEMS: Concepts & Strategy

TWO-SIDED MARKETS
Dr. Gaurav Dixit

Department of Management Studies
TWO-SIDED MARKETS
• Companies in banking, software, and media industries

generate revenues
– By linking markets from different sides of their customer networks
– For example:
• Credit cards link consumers and merchants
• Newspapers link subscribers and advertisers
• Computer operating systems link computer users and application
developers
• These businesses exhibit a distinct character

– Strategy formulation requires new approach
2
TWO-SIDED MARKETS
• Products and services that bring together groups of users in

two-sided networks are referred as platforms
• Platforms provide
– Infrastructure
– Transaction rules
• Platforms could be based on

– Physical products like credit cards
– Marketplaces like shopping malls such as Big Bazaar
– Websites such as Amazon, Flipkart, and eBay
3
TWO-SIDED MARKETS
Traditional Value Chain Two-Sided Networks

• To the left of the company is • Cost and revenue are both to
cost the left and the right
• To the right is revenue • One side is often subsidized
• Growth beyond some point • Increasing returns to scale

usually leads to diminishing – User bases grow
returns to scale
– Customer bases stagnate
4
TWO-SIDED MARKETS
• The two sides of platforms are attracted to each other- a

phenomenon that is called the network effect
• Platform’s value to a user depends on the no. of users on the

other side
• Critical mass of users in both the sides of the platform is key

to match demand from both sides and growth of platform’s
value
– Video game developers vs. players
• Upfront programming costs
5
TWO-SIDED MARKETS
• Competition in two-sided network industries can be fierce

– Platform leaders invest more in R&D or
– Lower their prices
• Mature two-sided network industries are

– Typically dominated by a handful of large platforms
• Credit card industry
– In extreme situations, a single company takes almost all of the
market
• PC operating systems
6
TWO-SIDED MARKETS
• Platforms serving two-sided networks are not a new

phenomenon
– Energy companies and automakers link
• Gasoline powered cars and refueling stations
• Due to advances in Technology, Platforms have become

more prevalent
– New platforms
• Google connects advertisers and web searchers
– Traditional businesses reconceived as platforms
• Retail electricity markets matching consumers and power producers
7
TWO-SIDED MARKETS
• Why many platform providers struggle to establish and

sustain their two-sided networks?
– Economics of network industries are different
– Assumptions and paradigms of traditional businesses don’t work
• What factors must be considered in designing a platform’s

business model?
– Key decision is Pricing
• Which side you subsidize, and for how long?
– Manage winner-take-all dynamics
• One company controls the dominant platform
– eBay’s auctions, Microsoft’s Windows
• Multiple companies share the dominant platform
– DVD, fax standards
8
TWO-SIDED MARKETS
• What factors must be considered in designing a platform’s

business model?
– “Bet the company” decision
• Should providers fight to gain proprietary control over the platform or
share the spoils with rivals?
– Established platform providers face a significant competitive threat

from large firms operating in adjacent markets
• These large firms have ability to offer a multiplatform bundle
9
TWO-SIDED MARKETS
• Get Pricing Right
– Subsidize quality and price sensitive users

• Adobe Acrobat Reader linking readers and document producers or writers
– Secure marquee users’ exclusive participation in your platform

• Shopping malls with prestigious anchor stores
10
TWO-SIDED MARKETS
• Cope with Winner-take-All competition
– Decide whether the two-sided market you’re eyeing will eventually be

served by a single platform
• DVD players
– Decide whether to share the single platform or fight for proprietary

control
• DVD format (1990s) vs. video players’ standards clash (1980s)
11
TWO-SIDED MARKETS
• Avoid Envelopment
– Platforms with overlapping user groups might swallow other

platforms’ users
• Mobile phones now incorporate music and video players, PCs, and credit
cards
– Consider changing the business model
12
13

Two-Sided Markets

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INDIAN INSTITUTE OF TECHNOLOGY ROORKEE

INFORMATION SYSTEMS: Concepts & Strategy

Dr. Gaurav Dixit

• Companies in banking, software, and media industries

• These businesses exhibit a distinct character

• Products and services that bring together groups of users in

• Platforms could be based on

Traditional Value Chain Two-Sided Networks

• To the right is revenue • One side is often subsidized

• Growth beyond some point • Increasing returns to scale

• The two sides of platforms are attracted to each other- a

• Platform’s value to a user depends on the no. of users on the

• Critical mass of users in both the sides of the platform is key

• Competition in two-sided network industries can be fierce

• Mature two-sided network industries are

• Platforms serving two-sided networks are not a new

• Due to advances in Technology, Platforms have become

• Why many platform providers struggle to establish and

• What factors must be considered in designing a platform’s

• What factors must be considered in designing a platform’s

– Established platform providers face a significant competitive threat

• Get Pricing Right

– Subsidize quality and price sensitive users

– Secure marquee users’ exclusive participation in your platform

• Cope with Winner-take-All competition

– Decide whether the two-sided market you’re eyeing will eventually be

– Decide whether to share the single platform or fight for proprietary

– Platforms with overlapping user groups might swallow other

– Consider changing the business model

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