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Critical Mass and Mature Equilibria for Two-Sided Platforms, and the Strength of the Externalities Between the Sides

Author

Listed:
  • ten Kate Adriaan

    (Independent Economist, Mexico City, Mexico)

  • Niels Gunnar

    (Managing Partner at Oxera, Oxford, UK)

Abstract

Critical mass is central to the development of two-sided platforms. It is the level of participation on both sides that is required to have the platform grow on its own force to a mature equilibrium. Despite this commonly understood dynamic, a formal definition of critical mass is missing in the literature on two-sided platforms, except for a proposal by Evans and Schmalensee (2010. “Failure to Launch: Critical Mass in Platform Businesses.” Review of Network Economics 9 (4)) who defined critical mass not as a single combination of platform sizes, but as a frontier in the two-dimensional space of those levels. We set out a demand model for two-sided platforms, propose a measure for the strength of the externalities between the sides and define critical mass in terms of this externality parameter. Our definition is more in line with the way critical mass is defined for one-sided networks. We also set out the conditions that must be met for the occurrence of critical mass.

Suggested Citation

  • ten Kate Adriaan & Niels Gunnar, 2024. "Critical Mass and Mature Equilibria for Two-Sided Platforms, and the Strength of the Externalities Between the Sides," Review of Network Economics, De Gruyter, vol. 23(2), pages 65-86.
    • Handle: RePEc:bpj:rneart:v:23:y:2024:i:2:p:65-86:n:1001
    DOI: 10.1515/rne-2024-0032
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    References listed on IDEAS

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    1. Jeffrey Rohlfs, 1974. "A Theory of Interdependent Demand for a Communications Service," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 16-37, Spring.
    2. Geoffrey G. Parker & Marshall W. Van Alstyne, 2000. "Information Complements, Substitutes, and Strategic Product Design," William Davidson Institute Working Papers Series 299, William Davidson Institute at the University of Michigan.
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    More about this item

    Keywords

    two-sided markets; network externalities; critical mass;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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