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The Economics of Two-Sided Markets

  • Marc Rysman

Broadly speaking, a two-sided market is one in which 1) two sets of agents interact through an intermediary or platform, and 2) the decisions of each set of agents affects the outcomes of the other set of agents, typically through an externality. In the case of a video game system, for instance PlayStation, the intermediary is the console producer -- Sony -- while the two sets of agents are consumers and video game developers. Neither consumers nor game developers will be interested in the PlayStation if the other party is not. Similarly, a successful payment card requires both consumer usage and merchant acceptance, where both consumers and merchants value each others' participation. Many more products fit into this paradigm, such as search engines, newspapers, and almost any advertiser-supported media (examples in which consumers typically negatively value, rather than positively value, the participation of the other side), as well as most software or title-based operating systems and consumer electronics. This paper seeks to explain what two-sided markets are and why they interest economists. I discuss the strategies that firms typically consider, and I highlight a number of puzzling outcomes from the perspective of the economics of two-sided markets. Finally, I consider the implications for public policy, particularly antitrust and regulatory policy, where there have been a number of recent issues involving media, computer operating systems, and payment cards.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.3.125
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Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 23 (2009)
Issue (Month): 3 (Summer)
Pages: 125-43

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Handle: RePEc:aea:jecper:v:23:y:2009:i:3:p:125-43
Note: DOI: 10.1257/jep.23.3.125
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  1. Simon P., ANDERSON & Jean J., GABSZEWICZ, 2005. "The media and advertising : a table of two-sided markets," Discussion Papers (ECON - Département des Sciences Economiques) 2005060, Université catholique de Louvain, Département des Sciences Economiques.
  2. John Rust & George Hall, 2001. "Middle Men Versus Market Makers: A Theory of Competitive Exchange," Cowles Foundation Discussion Papers 1299, Cowles Foundation for Research in Economics, Yale University.
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  10. Howitt, Peter & Griffith, Rachel & Aghion, Philippe & Blundell, Richard & Bloom, Nick, 2005. "Competition and Innovation: An Inverted-U Relationship," Scholarly Articles 4481507, Harvard University Department of Economics.
  11. Ettore Damiano & Li Hao, 2008. "Competing Matchmaking," Journal of the European Economic Association, MIT Press, vol. 6(4), pages 789-818, 06.
  12. Tobias Kretschmer & Katrin Muehlfeld, 2004. "Co-opetition in Standard-Setting: The Case of the Compact Disc," Working Papers 04-14, NET Institute, revised Oct 2004.
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  15. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  16. Marc Rysman, 2006. "An Empirical Analysis of Payment Card Usage," Boston University - Department of Economics - Working Papers Series WP2006-002, Boston University - Department of Economics.
  17. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 85-103, March.
  18. Robin S. Lee, 2007. "Vertical Integration and Exclusivity in Two-Sided Markets," Working Papers 07-39, NET Institute, revised Aug 2012.
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