As I mentioned in the previous post, one of the key problems for a two-sided platform is to get both sides on board the platform. For example, an auction website is not valuable to buyers if there are no sellers, and it’s not valuable to sellers if there are no buyers. In technical terms, the value of the platform comes mainly or entirely from ‘network effects’ that operate across the platform. Users on each side of the platform find it valuable precisely because it allows them to interact with users on the other side.

One of the key things determining the platform’s success at getting both sides on board is expectations. If users on each side expect that a lot of users on the other side of the platform will join, it’s more likely that the thing will get off the ground in the first place. One way to manipulate expectations is through advertising. Another way is to charge a low price or even subsidise users on one side of the market. Then they may be persuaded to join the platform even if their expectations are a bit pessimistic. Two-sided platforms have the advantage that low prices on one side can be offset by high prices on the other side, so such a strategy doesn’t necessarily have to be a money-losing one overall.

Another way to help get things off the ground is to target ‘important’ users on one side of the market or the other. These ‘marquee buyers’ raise the value of the platform by proportionally more than the typical user. For example, for videogame platforms, some game studios have more popular and well-known games than others. Getting such important users to announce their commitment to your platform can be very beneficial. If possible, it may be in the platform’s interests to offer bigger than average incentives for marquee buyers to join the platform.

In some cases, like with videogame platforms, one side of the market may have to commit to the platform before the other side does. With videogames, since games take time to develop, game studios have to commit to a platform before game players have to buy the platform. The problem is that the number of game players that join will depend partly on the price that the game platform maker sets for the consoles. Game studios prefer that the console price be low, so that lots of game players will join and they will sell a lot of games. However, once game studios have committed to a platform and started developing games, they are somewhat at the mercy of the game platform if it decides to raise console prices. Anticipating this, game studios may be reluctant to support the platform in the first place. To solve this problem, the platform might want to commit to low prices for consoles before it starts selling them, by publicly announcing the price that it will charge. I’ll talk more about this issue again later.

[tags]network effects, network economics, game platforms, two-sided markets[/tags]