In figure 2 , pricing without taking network effects into account means finding prices that maximize the areas of the two blue rectangles. Adobe initially used this approach when it launched PDF and charged for both reader and writer software.
Defining the relevant market in the sharing economy
In two-sided networks, such pricing logic can be misguided. If firms account for the fact that adoption on one side of the network drives adoption on the other side, they can do better.
Demand curves are not fixed: When Adobe changed its pricing strategy and made its reader software freely available, its managers uncovered a key rule of two-sided network pricing. They subsidized the more price sensitive side, and charged the side whose demand increased more strongly in response to growth on the other side. As illustrated in figure 3 , giving consumers a free reader created demand for the document writer, the network's "money side". Similarly, gaming manufacturers very often subsidize the gamers and sell their consoles at substantial losses e.
On the other hand, even though two-sided pricing strategies generally increase total platform profits compared to traditional one-sided strategies, the actual end value of the two-sided pricing strategy is contingent on market characteristics and may not offset the costs of implementation. For example, profits of an application provider increase with the implementation of a two-sided pricing strategy of the platform provider only if the application is subsidized by the provider.
Unfortunately, willingness to pay does not materialize on the money side, as few marketers were eager to target consumers who were so cost conscious. If building a bigger network is one reason to subsidize adoption, then stimulating value adding innovations is the other. While Apple initially tried to charge both sides of the market, like Adobe did in figure 2 , Microsoft uncovered a second pricing rule: In this context, consumers, not developers are the money side. Which market represents the money side and which market represents the subsidy side depends on this critical tradeoff: The size rule lets people increase adoption more while the value rule lets people increase price more.
Although recently developed in terms of economic theory, two-sided networks help to explain many classic battles, for example, Betamax vs. VHS , Mac vs. Visa, and more recently Blu-ray vs.
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Viewers had little reason to buy expensive color TVs in the absence of color programming. Likewise, broadcasters had little reason to develop color programming when households lacked color TVs. RCA won the battle in two ways. It flooded the market with low cost black-and-white TVs incompatible with the CBS format but compatible with its own. Broadcasters then needed to use the RCA format to reach established viewers. When two-sided markets contain more than one competing platform, the condition of users affiliating with more than one such platform is called multihoming.
Defining the relevant market in the sharing economy | Internet Policy Review
Instances arise, for example, when consumers carry credit cards from more than one banking network or they continue using computers based on two different operating systems. This condition implies an increase of "homing" costs, which comprise all the expenses network users incur in order to establish and maintain platform affiliation. These ongoing costs of platform affiliation should be distinguished from switching costs , which refer to the one time costs of terminating one network and adopting another.
Their significance in industry and antitrust law arises from the fact that the greater the multihoming costs, the greater is the tendency toward market concentration. Higher multihoming costs reduce user willingness to maintain affiliation with competing networks providing similar services. Attracted by the prospects of large margins, platforms can try to compete to be the winner-take-all in two-sided markets with strong network effects. That means that one platform serves the mature networked market. Not all two-sided markets with strong positive network effects are optimially supplied by a single platform.
Markets must have high multi-homing costs and similar consumers' needs. Even if the market has characteristics that could lead it to be dominated by one platform, companies can choose to cooperate rather than competing to be the winner-take-it-all.
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If the market naturally supports a monopoly platform, intense short-run fighting among competing platforms can be motivated by the desire to capture future monopoly profits. Since frequently platforms have overlapping user bases, it is not uncommon for a platform to be " enveloped " by an adjacent provider.
Usually, this occurs when a rival platform provides the same functionality of a platform as a part of a multiplatform bundle. If the money-side perceives that such multiplatform bundles delivers more value at a lower price, a stand-alone platform is in danger. If one cannot reduce price on the money-side or enhance one's value proposition, one can try to change one's business model or find a "bigger brother" to help.
The last option when facing envelopment is to resort to legal remedies, since antitrust law for two-sided networks is still in dispute. However, in many cases a stand-alone business facing envelopment has little choice but to sell out to the attacker or exit the field. From Wikipedia, the free encyclopedia.
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Archived from the original PDF on November 12, Rand Journal of Economics 34 2 — A Theory of Information Product Design. Eisenmann, Geoffrey Parker, Marshall W.
Two-sided market
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L40 - General JEL: Close mobile search navigation Article navigation. Abstract Since the seminal papers by Rochet and Tirole, the payment card industry has represented an elected field of study for the economic features of multisided markets and their effects on both regulation and antitrust analysis. Published by Oxford University Press. For permissions, please e-mail: You do not currently have access to this article. You could not be signed in. Sign In Forgot password? Don't have an account? Sign in via your Institution Sign in. Purchase Subscription prices and ordering Short-term Access To purchase short term access, please sign in to your Oxford Academic account above.
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