Monday, July 09, 2007

Two-sided Markets

In "Two-Sided Markets: A Progress Report," Rochet and Tirole explained the thinking behind the bourgeoning literature as of the end of 2005. "Getting the two sides on board" might be a useful characterization, but it didn't go nearly far enough. "We define a two-sided market as one in which the volume of transactions between end-users depends on the structure and not only on the overall level of the fees charged by the platform."

The two sides' willingness to trade depends on the policies of the platform; its membership (or fixed) fees get them into the tent; its usage (variable) fees condition their enthusiasm once they are there. A favorite example: dating bars, which charge men a stiff fee and let women in for free, making money on the sale of drinks. But in fact the model illuminates matchmaking in everything from portals such as Google and Yahoo, TV networks and newspapers (in which "eyeballs" are the stock-in-trade) to mobile phone networks, personal computers, credit cards and videogames (in which more sophisticated commodities are marketed).

That is from a book review of Catalyst Code, read more here.

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