

How to gain traction in two sided markets - vanwilder77
http://joel.is/post/39659497239/how-to-gain-traction-in-two-sided-markets

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zissou
Two-sided markets and platform competition have been popular topics for
microeconomic theorists since around the 2003 work of Rochet and Tirole[1]
(IMHO, Tirole will win the Nobel Prize in the next 3 years). These two helped
put together much of the generality left out of Baye and Morgan's 2000
paper[2] that looked at information gatekeepers on the Internet.

In the late 1990s and early 2000s, economists really began to look at the
Internet (Hal Varian, Google's Chief Economist is probably the best example --
see his 1998 book "Information Rules"[3]). They tried to tackle issues like
price dispersion in a homogeneous goods market on the Internet (that is, why
does price dispersion still exist in an Internet market for a homogeneous
good?) and other problems of consumer information heterogeneity, consumer
search, and so on. Starting in early 2000, economists began to take interest
to the "gatekeeper" model of Internet prices -- a website that would aggregate
prices across online retail sites. "If a consumer just has to go to one site
to become informed about all the prices in the market, then consumers can
costlessly become informed about all the prices in the market by going to the
gatekeepers site" many microeconomists said. This led many researchers to look
into the model of fees charged by gatekeepers to retailers who wanted to have
their prices posted on the site.

Eventually, Tirole et al realized a way to generalize the concept of a two-
sided market by describing it as a platform where the owner of the platform
receives revenue from two [or more] sources (i.e. buyers via advertising and
sellers via gatekeeper fees), hence making the general distinction between a
multi-sided market and the the classic supply/demand market model. Today
multi-sided markets are used to model almost all forms of platform
competition.

From my perspective, research on the economics of the Internet hit a bit of a
slump in the late 2000s as [too] many economists instead focused on
macroeconomic issues during the bubble, but has grown in interest quite a bit
again over the last 3-5 years with the rise of social networking and similar
app/mobile platforms. So much of this research relies on fundamental models of
two-sided markets, that I encourage anyone curious about really hot
microeconomic theory topics related to the Internet and start-up industry to
dig into platform competition.

[1] _Platform Competition in Two-Sided Markets_ ,
<http://ideas.repec.org/p/ide/wpaper/654.html>

[2] _Information Gatekeepers on the Internet and the Competitiveness of
Homogeneous Product Markets_ ,
<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=215548>

[3] _Information Rules_ , <http://www.amazon.com/gp/product/087584863X/>

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ssharp
I'm not sure if I'd consider Facebook's model to be two-sided, at least their
startup model. I'd consider two-sided markets to be businesses like eBay or
Airbnb.

I remember reading something on Airbnb (it might have been a Mixergy
interview) and one of the takeaways for building a two-sided market is to
employ promotional tactics that are not scalable. If I remember correctly,
Airbnb went to New York City and started knocking on doors to drum up
listings. Obviously, such a sales tactic at scale would be extremely expensive
and prohibitive, but when starting out, you need that level of intimacy to get
off the ground. I believe the other example from that article was a
babysitting service where the founder went around town and plastered fliers
where appropriate.

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terpin
Another typical strategy is the "girls get in free" nightclub strategy.
Although ultimately it might be possible to make money from the market itself,
in the early days it's almost certainly the case that whichever side is harder
to attract probably needs to get the service for free.

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wtvanhest
A third way, which is more like what Facebook did is to get a chunk of the
market signed up all at once and hold them there until network effects take
hold.

If you add all the photos for Harvard students, that is the chunk.

~~~
malandrew
Facebook isn't two-sided. The consumers are producers and vice versa.

At the very least isn't any more two-sided than Google Web Search. Advertising
on Facebook (and Google) were added way later to monetize and already
successful product traction-wise.

A two-sided market is one where the buyers and sellers (or any combination of
counterparties) are generally mutually exclusive from one another and
dependent on the existence of the complementary counterparty for the market to
provide utility.

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nchuhoai
Relevant is Fred Wilson's Single User Utility:
[http://www.avc.com/a_vc/2012/12/single-user-utility-in-a-
soc...](http://www.avc.com/a_vc/2012/12/single-user-utility-in-a-social-
system.html)

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dshah
I like the single-player mode vs. multi-player mode analogy. That's a useful
way to think about it.

