Friday, September 4, 2009
Marc Rysman at BU has a nice introductory paper on two-sided markets (The Economics of Two-Sided Markets) appearing in the current Journal of Economic Perspectives. Two-sided markets are relatively common and often involve some level of network exteranality. They are interesting from a "deals" perspective because it can be extremely difficult to structure transactions involving two-sided markets. These transactions often involve joint ventures to develop the intermediary - Mastercard and Visa are classic examples of two-sided markets. They have been a big success. But, @Home Corporation (cable-based Internet provider) and Irridium (satellite phone service) are less successful examples. While economists have recently started studying two-sided markets, legal academics are lagging behind. That's too bad, because these are interesting markets where there's a lot of complicated structuring going on.
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.