Kaushal Sharma, Shanker Singham, Jul 27, 2010
A two-sided market refers to a type of economic transaction or network in which there are two distinct user groups and the demands of each group are both dependent and subject to economies of scale. In their paper, Two-Sided Markets: A Progress Report, Rochet & Tirole describe a two-sided market as one “in which the volume of transactions between end-users depends on the structure and not only on the overall level of the fees charged by the platform.” In two-sided markets, the demand of one set of end-users impacts the demand of the other set of consumers more than cost-based pricing. In other words, “[a] platform’s usage or variable charges impact the two sides’ willingness to trade once on the platform, and thereby their net surpluses from potential interactions; the platforms’ membership or fixed charges in turn condition the end-users’ presence on the platform.” An end-user in a two-sided market does not internalize the welfare impact of his use of the platform; rather, in a two-sided market, one set of consumers’ choice of a good affects another set of consumers’ choice of a different good. Coordination across markets matters in two-sided markets, whereas coordination within markets may have little effect.
Two-sided markets, once a rarity, are now much more the norm. Traditional markets in which a producer supplies goods and services directly to consumers have been replaced by two-sided markets where products and services that consumers want are ever-more complex and technology-driven. It is important to distinguish between traditional markets and two-sided markets because two-sided markets are characterized by fundamentally different economies of scale, as described above. The unusual effects of two-sided markets can often prove to be “vexing” to antitrust regulators, for “producer and consumer surplus can move together,” rendering traditional regulatory regimes ineffective. The differences between traditional markets and two-sided markets need to be understood as much by regulators as those operating in the markets.
