Definition of two-sided markets
A two-sided market is a meeting place for two sets of agents who interact through an intermediary or platform.
Getting both sides on board is fundamental for the development and success of each platform and to our understanding of the pricing strategies followed by market participants.
In considering the platform pricing strategies, the economics literature has demonstrated that the characteristic that distinguishes two-sided markets is that the pricing structure (the relative prices charged to each side), matters.
The fact that two-sided markets are based on externalities, such as group or network externalities, and that the structure of prices matters, as much as their level, has important consequences for regulation. First, we should not expect to find a direct relationship between the price charged on one side and the incremental cost of serving that side. The prices that maximize consumer welfare will in fact often depart from the cost-reflective ones. Second, any change imposed to the price on one side will also change the price on the other side of the platform, thus creating a waterbed effect.
A mall is a two-sided market in that consumers can find their favorite shops; credit cards are two-sided markets composed of cardholders and merchants; a newspaper is a two-sided market in that it brings together advertisers and readers; A mobile phone network is a two-sided market because it helps people who want to receive calls get together with people who want to make those calls.
As a consumer I want to go to the mall that has the “right” shops or the wider variety of brands, I will use the credit card that most retailers accept, I will buy the operating system with the best applications, or I will subscribe to the mobile network with the largest customer base.
There are many platforms in which one side pays nothing, or even receives inducements, to participate: shoppers in a mall, application developers, some credit card customers, free newspapers. More generally, each platform provider will try to balance prices in order to encourage take-up on both sides, which means that the prices charged to each side are jointly determined.