Two-Sided Markets: An Overview∗

The paper offers an introduction and a road map to the burgeoning literature on two-sided markets. In many industries, platforms court two (or more) sides that use the platform to interact with each other. The platforms’ usage or variable charges impact the two sides’ willingness to trade, and thereby their net surpluses from potential interactions; the platforms’ membership or fixed charges in turn determine the end-users’ presence on the platform. The platforms’ fine design of the structure of variable and fixed charges is relevant only if the two sides do not negotiate away the corresponding usage and membership externalities. The paper first focuses on usage charges and provides conditions for the allocation of the total usage charge (e.g., the price of a call or of a payment card transaction) between the two sides not to be neutral; the failure of the Coase theorem is necessary but not sufficient for two-sidedness. Second, the paper builds a canonical model integrating usage and membership externalities. This model allows us to unify and compare the results obtained in the two hitherto disparate strands of the literature emphasizing either form of externality; and to place existing membership (or indirect) externalities models on a stronger footing by identifying environments in which these models can accommodate usage pricing. We also obtain general results on usage pricing of independent interest. Finally, the paper reviews some key economic insights on platform price and non-price strategies.