Business Essay Sample: Two-sided Markets

Features of two-sided markets

This segment focuses on discussing the characteristics of two-sided markets that differentiate them from the traditional single-sided organizations.

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The externalities of network

Network externalities exist when there is an increase of agents using a certain commodity resulting from the utility that a consumer accrues from consuming the goods (Katz, 1985). However, most of the two-sided markets encounter network effect challenges that may heighten to critical masses. For instance, when engaging with intermediation service platform, the buyer will have to consider the expenses he/she will incur for the product or service and some sellers using the platform. While on the sellers-side, joining the platform will entirely depend on whether there are adequate numbers of potential purchasers among other additional benefits that the platform delivers. Thus, the scope and size of the other network act as a quality determiner in the choice of adopting a platform (Roson. p.150). Indirect network refers to the size influence of the opposite network (Economides and Katsamakas, p.1061).

Also, the effects on network can exist in more than two sided marketplaces that are developed by attracting the users on the first side in comparison to the second side. For instance, if many customers purchase the PlayStation consoles the more will the new clients be attracted to trade games with their partners (Eisenmann et al., p.92).

Multi-homing

Multi-homing phenomenon relates to the adoption to various platforms of a segment of all the users. For instance in the use of the credit card services, when a seller accepts several payments by the use of credit cards, the vendor is multi-homing. This is similar to when a customer acquires several credit cards for payment purposes. The opposite of multi-homing is a single-homing phenomenon, this refers to the application of a single platform for one or both sides. Therefore, due to the wide range of availability of alternatives for users the pricing of multi-homing segment tend to be cheaper because there is high level of competition in this form of platform thus lowering their prices (Evans, p.39). The multi-homing platform adversely affects the pricing approach by making it become complicated because this type of platform chooses a pricing model that charges on one side thus affecting the behavioral outcome of the other side. For instance, if the platform affects the fees of transactions to be substantially higher for the use of credit card A, this may force the clients to use the vendor mode of payment (Roson, p. 150).

The management of the two-sided platform

Rochet and Tirole, (p.650) defines the two sided market as a platform that enables the engagement of the sellers and their customers (two sides) who require to network. Most of these studies on two sided marketplaces usually focus on a significant factor known as the price models adopted by the platforms so as to capture adequate market determiners on both sides. Thus in this type of a platform a particular price strategy has to be incorporated so as to balance both sides interests and keep the market relevant (Parker, p.1499). As such there are numerous examples on the transitional platforms in the global business that is the online and the offline. A significant example is the shopping malls whereby the purchasers are likely to go shopping in a mall if it represents a wide range of retailers to select from while on the side of the sellers, the retailers will set up a shop in the shopping mall and incur the rental expenses is the mall has the capacity and capability of facilitating a good flow of customers. Another example of two-sided platform is the television channels whereby they operate by creating a communication connection between the advertisers and the audience. However, the disadvantage of this network effect is that the audience usually prefers to pay attention to programs that exhibit fewer advertisements while the traders prefer to incur more advertising costs to use a TV channel with high and a wide range number of audiences (Armstrong, p.675).

Significantly, business models should differentiate the two-sided markets from the merchants. The basic distinction between the two aspects is that the merchants are in control of their sales and own the sellers' products, whereas the two-sided markets has no control over the sale processes and thus leave it to the sellers, but the markets is involved in determining the connection between the purchasers and sellers with a common market location (Hagiu, n.p).

Pricing

Pricing of products and services is a crucial aspect when referring to a two-sided market platform. It is because pricing models on one or both sides can significantly influence the client's rate of adoption thus affecting the entire business model platform. This factor applies even when the owner of the platform accrues income from both all sides in the market, this is because the two-sided marketplaces have a characteristic of divide and conquer. The divide and conquer nature of the two-sided markets involves subsidizing the participation of a single side of the marketplace and loss recovery from the resulting second segment (Caillaud and Jullien, p.315). Thus in the case of shopping malls they almost do not charge visitors, but rather they highly depend on renting out of spaces to sellers for their profits and also charge match-making websites on both sides thus joining the platform. The price structure is modeled by platform providers after determining which side to subsidize. There are three categories of drivers to optimum price levels in the two-sided marketplaces that is, expenses of the platforms, and determinants of demand-oriented and competition-oriented (Zingal and Feriha, p.98). In most scenarios platforms utilize fixed membership charges or place charge on each and every transaction or even place fees on the combination. The fixed pricing model charging both or one side of the market is placed on a permanent fee to contribute to the setup. This method of charging two-sided marketplace is not dependent on the performance of the platform of the other segment. Other than establishing the fixed subscription model, several platforms prefer adopting a pricing strategy for the charges whereby variable charges are incurred from the transactions made. The central distinction that is evident between the two systems is that the effects on the network are feebler on the cross side in relation to pricing per transaction. For instance, if the intermediary makes payments only when there exists a successful transaction, therefore, the agent is not affected by the performance of the platform on the other side.

Rochet and Tirole (n.p) constructed a model to differentiate between the subscription fee and the charges on usage and concerning subscription externalities and the external users. The ex-ante platform may place a charge for engaging with the marketplace independently by use of fixed fees up to a certain level where the subscribers on one side of the marketplace acquire positive surplus in the engagement with other users on the other segment. The membership decision making normally accrues to subscriber externalities. The ex-post platform may place a fee for usage of a product or service, this influences the decisions made by the user, and in turn, it heftily has an effect on the usage externalities. Nonetheless, the profits accrued from transactions made between the consumers frequently are as a result of usage and decision making of the user are reliant on the amount of fees placed on the platform usage.

The ‘chicken-and-egg’ issue

This is experienced by both the newly laid and established business platforms. In the case of newly laid platforms, a precarious mass construction must be sufficiently fulfilled to ensure that the business platform attains its viability. After the crucial mass has been attained, the platforms can proceed to connect network effects so as to catalyze business development (Evans, n.p). It is important for the platform providers to critically evaluate and make a decision on the selection of subsidy side. The subsidy side refers to the side that captures the attention of the other side after it attains a certain level of volume. The price approach of this platform heavily relies on how the set-up is capable of solving classic business challenges. Eisenmann et al., (p.92) proposed strategic approach in which the platform can develop in the effort of coping with the chicken and egg problem by outlining crucial factors to manage the platform. They include;

The capability of the platform to attract network effects.

The sensitivity of pricing to the user.

The giveaway expenses or establishing market strategies to attract a single side of the market.

Network effects markets of the same-side.

The presence of brand users.

As such an author named Evans illustrated that the sequential growth of platforms could occur by offering goods and services for a single segment of the market prior to concentrating on the other market segment.