A two-sided platform is a business that creates value by bringing together two distinct customer groups. I’ve blogged about these before — see here. Basically, the platform allows interactions or ‘matches’ between customers in the two groups. Two-sided platforms are common Internet businesses, because these are often information-based businesses, and the Internet reduces the costs of collecting and disseminating information. As a concrete example, think about Google’s search. It attracts web searchers by providing an efficient search engine. It then matches searchers with advertisements, and shows relevant ads to the searchers. The whole thing is a two-sided platform that creates value by matching searchers and advertisements. Facebook, Digg, Google’s mobile platform and iTunes are other examples.

The thing is, in many cases, not all matches between the two sides of the market are created equal. As I talked about before, the ‘quality’ of a match often matters for how valuable it is. In this case, we should not overlook the ability of prices to improve quality. One function of a price is to prevent people from buying something, thus you can use it to keep low quality customers out of the market and prevent them from making bad matches with your other customers. I can’t remember where I read it, but the following sums it up very nicely for me: Why do (heterosexual) nightclubs typically charge men for entry and not women? Because women prefer quality, while men prefer quantity. Setting a price for men keeps the low quality men out of the club, and increases the quality of potential matches for women. This increases the willingness of women to go to the club, because they know it will only be populated by men who found it worthwhile to pay the entry fee.

Now we can apply the same concept to online platforms. One of my pet annoyances at the moment is Google Gadgets. These are little software applications that you can add to your website or your personalised Google homepage. The gadgets do things like show weather or stock reports, and so on. My complaint is that the average quality of gadgets is low. There are some very good ones, but quite a few useless ones, and many that I’ve tried have bugs and so on. I think this is in part due to the fact that Google does not charge software developers to create gadgets. In fact, it offers funding to developers. While this will increase the quantity of gadgets available, it only serves to decrease quality, I think. Thus the value of matches between gadget users and gadget developers is low, and the value of the platform itself is probably less than it could be.

I admit that it’s difficult to know whether it’s more important to have a large quantity of applications available, compared to a smaller number with higher average quality. Personally, for software I think applications users have a high preference for quality. Apple also seems to think so, based on its strategy of a relatively controlled environment for its iPods and iPhones. It’ll be interesting to see whether Google takes steps to improve the quality of its gadgets over time.