5. Business Platform
• an intermediary between two or more sides of a
market (Wikipedia)
• Two-sided market =
– two distinct user groups
– provide each other with network benefits
• Examples:
credit cards: cardholders and merchants;
HMOs: patients and doctors;
operating systems: end-users and developers;
travel reservation services: travelers and airlines, hotels,
etc.;
– yellow pages: advertisers and consumers;
– video game consoles: gamers and game developers;
– communication networks
–
–
–
–
6. sumers want producers before either prefers a new
format.
An incumbent firm producing content for one format probably does not welcome entry by a competing firm producing similar content if there is no
profitable exchange between them. This mitigates a
network effect within one side of the market. Buyers
in the end-consumer market, however, welcome entry
to other content-providing firms if effective consumer
demand rises instead of falls.
Consider, finally, a third participant, the focus of
our attention here, who produces tools to support
both content creators and end consumers. These
are “platform” intermediaries. Examples in Table 1
include Sun, Apple, and Microsoft, who support software developers as well as private and business
More Examples
Table 1
Two-Sided Market Examples
Product category
Market 1
Intermediary
Portable documents
Credit cards
Operating systems
Plug-ins
Ladies’ nights
TV format
Broadcast & publishing
Document reader
Consumer credit
Complementary applications
Applications software
Men’s admission
Color UHF, VHF, HDTV
Content
Computer games
Auctions
Academic journals
Recruiting
Reservation systems
Shopping malls
Streaming audio/video
Paid search
Stock exchange
Home real estate
Game engine/player
Buyers
Articles
Applicants
Travelers
Shoppers
Content
Searchers
Equity purchasers
Home buyers
Adobe
Issuing bank
Microsoft, Apple, Sun
Microsoft, Adobe
Bars, restaurants
Sony, Phillips, RCA
Magazine publishers, TV,
radio broadcasters
Ubisoft, ID, valve, electronic arts
E-Bay, Christie’s, Sotheby’s
Management Science
Monster.com
Expedia, Travelocity, Orbitz
Mall of America
Real audio, Microsoft, Apple
Google.com
NYSE, NASDAQ
Real estate agents
Market 2
Document writer
Merchant processing
Systems developer toolkits
Systems developer toolkits
Women’s admission
Broadcast equipment
Advertisements
Level editors
Sellers
Author submissions
Employers
Hotels, airlines, rental cars
Stores
Servers
Marketers
Listed companies
Home sellers
Notes. This table shows how one side of a two-sided network market receives a discounted, free, or even subsidized good (indicated with ). In general
though not always, Market 1 can be interpreted as the user/consumer market and Market 2 can be interpreted as the producer/developer market. We provide
a test for which side receives the free good below.
Parker and Van AlstyneElectronicTwo-Sided Network Effects Management Science 51(10), pp. 1494–1504
(2005): copy available at: http://ssrn.com/abstract=1177443
available online at http://ssrn.com/abstract=1177443
8. Network Effect
Value of the Network
(Metcalfe’s Law)
Vj = n2 * p
V: Value of Network
n: number of participants (nodes, end points)
p: some constant
(Beckstrom’s approach)
Vj = ∑i,j(∑Bi - ∑Ci)
V: Value of Network j
∑B: benefit value of all transactions
∑C: cost of all transactions
Illustration by Derrick Coetzee
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Verdier, M. (2006). Retail Payment Systems: What can we Learn from Two-Sided Markets? MPRA Paper
No. 2606. Available at: http:// mpra.ub.uni-muenchen.de/ 2606/
#
10. Pricing
Price
+∆V
VA
(1-σ) VA
NU
+∆U
+∆U
Quantity
Parker, G., Van Alstyne, M (2005). Innovation Through Optimal Licensing in Free Markets and Free
Software. Woprking Paper. Available at: http://ssrn.com/abstract=639165
Figure 2: A fraction, σ, of the original platform value, VA is made freely available, leaving direct
platform profit of (1 − σ) VA . Opening the platform permits developer enhancements, which add
