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The Economics of Two-Sided Markets

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  • Marc Rysman

Abstract

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.

Suggested Citation

  • Marc Rysman, 2009. "The Economics of Two-Sided Markets," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 125-143, Summer.
  • 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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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.3.125
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    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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