Vorlesung 3: Platforms and Two-Sided Markets

Question 1

Network effect ≠ product value due to market size

Question 2

Five technologies that facilitate platform innovations

Answer 2

Powerful Chips
Cloud Services
Pervasive Internet
Large bandwidth
Programming languages
… by
▪ reducing cost
▪ increasing speed
▪ expanding the scope of connections between platform sides

Question 3

But how to set prices in two-sided markets with network effects?

Answer 3

Two general cases:
1. Two market sides are priced individually with respective optimal prices for each side
2. The interaction between user and provide is priced with a „transaction price“

Question 4

Pricing in two-sided markets

Answer 4

Question 5

Strategic considerations: Who is charged by the platform?
Money side vs. subsidy side

Answer 5

Question 6

Multi-homing

Answer 6

More than one platform in the two-sided market
Some users may affiliate with more than one platform (⟶ multi-homing) Examples
▪ Consumers with credit cards from more than one bank
▪ Hosts offering on Airbnb and Wimdu
Multi-homing comes at increased “homing” costs
▪ Setting up accounts
▪ Organization, Control, Management
▪ Coordination
▪ Reputation
Such costs of platform affiliation must be distinguished from switching costs (i.e., the costs of terminating one network and adopting another)
High significance for industry and antitrust law: Multi-homing costs induce a tendency toward market concentration and monopolies

Question 7

Platform’s chances within dis-balanced markets

Answer 7

When a market is out of balance, that is, when one side is much more powerful than the other, there occur opportunities for platform operators to exploit the less powerful side.
Examples: real estate platforms in the years 2010- 2021; job ads on career networks; some dating/partnership platforms
Most often, market power results from the fact that actors from one side are much less frequent than from the other.