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Two-sided markets are defined as markets where one or several platforms “enable interactions between distinct groups of customers, while trying to get the two sides ‘on board’ by appropriately charging each side”. In other words, two-sided markets (or platforms) serve two or more end-users that would like to interact but cannot do so without the platform.
The factors that make a market two-sided include (a) transaction costs among end-users (b) platform-imposed constraints on pricing between end-users, and (c) membership fixed costs or fixed fees.
Two-sided markets facilitate exchange between members of different groups: as in a credit card payment system, where a larger number of credit card holders increases the stores’ demand for credit card terminals, or a publisher’s ability to sell advertising spaces based on the number of people who buy or have access to the newspaper. Other examples include online auction platforms, dating clubs, and video game platforms.
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In the case of two-sided markets, the corresponding definition is more complex than in one-sided markets. In order to analyse the relevant market definition, it is important to take into account that the customer base in one market determines the success in the other market. For example, the number of sellers on an online auction platform has a positive impact on the utility of the buyers and vice versa.
Such interaction is known as indirect network effect, which arises as more consumers join one or the other side of the market. In cases where the indirect network effect is not very significant, a one-sided market definition might be appropriate. However, if the indirect network effects are substantial, the implementation of the hypothetical monopoly test to only one side of the market could lead to a fallacy in the assessment of the platform’s constraints.
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