Two-Sided Markets and Platform Pricing

Takeaway

Platforms must balance cross-side externalities; optimal pricing often subsidizes one side to attract the other, affecting adoption and competition.

The problem (before → after)

Before: Single-sided pricing misses cross-side responses.
After: Model both sides’ demand and cross-side effects to set prices and design policies.

Mental model first

Think of a dance: more leaders attract more followers and vice versa. The organizer might discount one group to balance the floor.

Just-in-time concepts

Cross-side elasticities; price structure vs price level.
Multi-homing and exclusivity.
Platform differentiation and steering.

First-pass solution

Write demands D_A(p_A, n_B), D_B(p_B, n_A); choose p_A, p_B to maximize platform objective subject to equilibrium adoption; analyze welfare and antitrust.

Steering/search bias and self-preferencing.
Interoperability mandates vs innovation incentives.
Regulation of gatekeepers and access pricing.

Principles, not prescriptions

Optimize price structure, not just levels; consider subsidies.
Guard against foreclosure; ensure contestability.

Common pitfalls

Ignoring multi-homing; over-subsidizing one side without retention.
Neglecting governance (rules, trust & safety).

Connections and contrasts

See also: [/blog/network-effects], [/blog/diffusion-of-innovation].

Quick checks

Why subsidize? — To unlock cross-side demand.
Why price structure? — Who pays matters more than total take rate.
Antitrust angle? — Platform power via cross-side control.