Business Models in Two Sided Network Markets Presentation by Serban Ranca

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Business Models in Two Sided Network Markets
Presentation by Serban Ranca
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Two Sided Markets

• Very recently studied in Economics
• first contribution is Rochet and Tirole (02)
• Markets where one or several matchmakers
  enable
• interactions between different groups of
  customers and try to get the two (or multiple)
  sides on board (Rochet and Tirole 04)
• Why study? Some of the most important markets
  today are
• two sided markets

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Two Sided Markets

• Note the matchmaker (platform) makes money only
  by facilitating interactions among different
  types of customers. This occurs if multiple
  sides of the market (customer groups) are
  participating and if each group values (at least)
  one of the others
• Next Types of two sided markets (Evans 03)

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A). Market-makersmatching buyers and sellers
without taking possession of the goods
Business Market-maker (Platform) Side A Side B
Electronic commerce B2B, B2C exchanges (EBay, Purchase Pro) Sellers Buyers
Real estate Broker Sellers Buyers
Securities Stock exchanges Sellers Buyers
Commerce Shopping Mall Sellers Buyers
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B) Advertising supported media match groups of
buyers and sellers
Two Sided Market Matchmaker (Platform) Side A Side B
Satellite Radio Radio Network (Sirius, XM) Advertisers Listeners
Television TV Stations Advertisers Viewers
Newspapers Magazines Advertisers Readers
Web Media Web sites (exMy Space) Advertisers Users
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C) Computer Software
Matchmaker (Platform) examples Side A Side B
Microsoft Software developers Users
Apple Software developers Users
Open Source Developers Users
Palm (PDA) Developers Users
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D) Video Games
Matchmaker (Platform) examples Side A Side B
Microsoft (XBOX) Game publishers Gamers
Sony Game publishers Gamers
Nintendo Game publishers Gamers
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E) Credit Cards
Matchmaker (Platform) examples Side A Side B
VISA Merchants Buyers
Mastercard Merchants Buyers
AMEX Merchants Buyers
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When is a two sided market successful? (Rochet
and Tirole 02)

• Creating value
• 1. Help groups that need each other match
• 2. Reduce search costs
• 3. Reduce transaction costs
• ..And doing it better than the competition!

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Starting up a Matchmaking Business Chicken and
Egg problem (Rochet and Tirole 02)

• Example to attract software developers you need
  users but to attract users you need software
  developers. How to solve this?
• 1. Start by providing your own applications
  (Microsoft)
• 2. Get killer applications to join early on
  (Nintendo, Sirius)
• 3. Contingent contracts
• 4. Pricing

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Pricing by a Match-Making Business (Evans 03)

• 1. It is important to balance demand on both
  sides.
• to make platform attractive for different
  customer groups
• 2. If customers on side A are very valuable to
  customers on side B, compared to group Bs value
  from matching with group A, CHARGE GROUP B MORE
  THAN GROUP A

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Pricing by a Match-Making Business Continued
(Evans 03)

• Sometimes price is below marginal cost on one
  side of the market to encourage those customers
  to join (this can happen for instance when the
  business is started). The firm can make profit
  from the other side(s)

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Pricing by a Match-Making Business Examples
(Evans 03)

• 1. Software platforms (Microsoft)
• started by allowing free access to developers
  (to encourage applications to be created) and
  charging users.
• 2. Videogame consoles
• Make profit from game publishers but set the
  console price to gamers below marginal cost

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Pricing by a Match-Making Business Examples
(Evans 03)

• 3. Newspapers
• some charge both sides (advertisers and
  readers), others only one side (Craigslist)
• 4. Credit cards
• more complex pricing scheme including
  sometimes both access fees and use charges to
  sellers and buyers

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References

• Evans, D 2003 The Antitrust Economics of Two
  Sided Markets, AEI-Brookings Joint Center, Mimeo
• Rochet J, Tirole J 2002 Platform Competition in
  Two Sided Markets, Journal of The European
  Economic Association
• Rochet J, Tirole J 2004 Two Sided Markets An
  Overview IDEI Working Paper 2004