Platform Economics: Essays on Multi-Sided Businesses

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Sneak Peek: Introduction to the new CPI eBook

Platform Economics: Essays on Multi-Sided Businesses
by David S. Evans

This volume collects a series of essays that I have written, sometimes with colleagues, over the last decade on businesses that create value by providing products that enable two or more different types of customers to get together, find each other, and exchange value. These businesses were called “two-sided markets” in the seminal paper by Jean-Charles Rochet and Jean Tirole that was first circulated in 2001.[1] I typically avoid this term since it tends to obscure the fact that we are talking about businesses rather than markets. I prefer the term “multi-sided platforms” because these businesses provide a place for customers to meet and interact and often support more than two interdependent types of customers. In writing for business audiences I use the term “catalyst” to denote the fact that these businesses create value that couldn’t be had without bringing these customer types together.[2] The term “two-sided markets” has stuck, though, and I will use it here.

The Rochet and Tirole paper ignited work on two-sided markets in economics, law, and business. Several other papers, in circulation around 2000, touched on some of the interesting aspects of intermediaries[3] or on the increasingly widespread phenomenon of giving one product away for free to attract revenue from another product.[4] The Toulousians’ contribution was fundamental because it recognized for the first time that a very diverse set of businesses were two-sided, presented an elegant economic model of them, and derived several robust aspects of these businesses including the critical importance of the price structure (the relative prices charged to the various types of customers) in their making money.

Economic theorists and empiricists were quickly attracted to this topic. The mill of articles and dissertations has flourished ever since.5 It soon became apparent that this new area had important implications for antitrust. Many competition authorities took notice and law review articles addressed various aspects of these newly-recognized business forms.[6] The corporate world seized on this new field. Strategy articles and courses focused on these platforms began appearing.[7] Companies found the subject eye opening, including firms that were multi-sided platforms but had not quite understood the ramifications.[8]

My contributions to this literature are presented in this volume. Part I presents background pieces on the economics of multi-sided platforms and industries in which these platforms are common. Part II examines the antitrust economics of two-sided markets including the difficult problem of defining the boundaries of competition. Part III comprises several papers that apply two-sided market analysis to web-based businesses. Part IV does the same for payment cards which is the industry that attracted much of the early two-sided analysis- in part because this framework was helpful for understanding the hotly debated issue of interchange fees. Part V collects several article
and book chapters on software platforms. These platforms have become especially important in the last several years because they are now the basis for revolutionary developments with mobile devices (e.g. the iPhone and Android), social networking (Facebook in particular), and payments (PayPalX). The essays are published as originally written (usually, in fact, whatever version I could make freely available).

When the theory of two-sided markets was first introduced it was common to hear at least two complaints. The first was that there was nothing new-from economists who suggested that it was just the indirect network effects wine in new bottles or antitrust analysts who commented that it had all been considered before in advertising cases. The second was that it was a theory of everything, and therefore nothing, since everything seems to be two-sided.

There’s some truth, of course to both arguments. Indirect network effects are usually essential to understanding two-sided markets. But the network effects literature missed the importance of these effects for a very diverse group of industries among other things; the literature spent a lot of time on fax machines and video standards but not so much on more general business issues such as pricing or industries such as shopping malls that did not obviously have indirect network effects. Two-sided market analysis is at least a richer and more subtle wine.

One of the problems with two-sided market analysis is that it is hard to find formal limiting principles. But that isn’t uncommon in economics. Sometimes a two-sided market perspective is highly informative while other times it isn’t. It matters when it matters. What’s now very clear, with the benefit of a decade of work, is that the study of multi-sided platforms has provided valuable insights to economists, policymakers and business people, as I hope the chapters in this volume demonstrate.

[1] Jean-Charles Rochet and Jean Tirole, “Platform Competition in Two-Sided Markets,” Journal of the European Economic Association 1, no. 4 (2003): 990-1209.
[2] David S. Evans and Richard Schmalensee, Catalyst Code: The Strategies behind the World’s Most Dynamic Companies (Cambridge, MA: Harvard Business School Press, 2007).
[3] Bernard Caillaud and Bruno Jullien, ” Chicken & Egg: Competition among Intermediation Service Providers,” RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-28, Summer.
[4] Geoffrey Parker and Marshall Van Alstyne (2005). “Two-Sided Network Effects: A Theory of Information Product Design.” Management Science, Vol. 51, No. 10.
[5] With the recent important work of Glen Weyl we have moved on to Two-Sided Markets 2.0. See Glen Weyl, “A Price Theory of Multi-Sided Platforms,” American Economic Review, 2010, 100(4).
[6] OECD Organization for Economic Co-operation and Development (“OECD”), Two-Sided Markets, DAF/COMP (2009) 20, 28.
[7] See, for example, Thomas Eisenmann “Managing Networked Businesses: Course Overview.” Harvard Business Online, 2006;Thomas Eisenmann, Geoffrey Parker, and Marshall Van Alstyne, “Strategies for Two-Sided Markets.” Harvard Business Review, 2006.
[8] Companies in the payment card industry, for example, have fundamentally changed how they think about that business as a result of the two-sided market concepts.

An electronic copy of is available as a downloadable PDF.