Matchmakers/Meeting Place Two sides: Boys and Girls.

Chicken-Egg Problem If boys come, girls follow. If girls come, boys follows.

You must attract one side in order to attract the other side.

How do you attract them? What is your price scheme?

Acrobat PDF/ Reader, Writer

Two sides; readers and writers. PDF program ‘matches’ between readers and writers.

The value of PDF writer depends on how many customers have PDF reader.

The value of reader depends on how many customers have writer.

PDF reader is free. A high price for the PDF writer.

Mini case studies, Video Games End users and game developers. A platform cannot sell the console without games to play

on A platform cannot attract game developers without selling

the console to end users.

You must attract both sides. A very low hardware price and a high licensing

fee.

Merchant

Customer

American ExpressDiscover

Diner Club

1.Shop

IssuerAcquirer

3Merchant discount 2

2

3

2

3(Access fee set by the system)

2. Authorization 3. Settlement

4. Bill/Pay

Streaming-media technology The current competition is among the RealNetworks, and

Microsoft. Clients side/ Server Side RealNetworks offers clients, a basic, free client program. They charges significant amounts on the server side

Portals and media Advertiser/ Eyeballs The business model of (non-pay) TV and to a large extent

newspapers has been to use viewers and readers as a loss leader, who attract advertizers.

This business model has been adopted with a vengeance by Internet portals, which have supplied cheap or free Internet access as well as free content (share quotes, news, e-mail, etc....) to consumers.

Two-sided Market The 1st important feature: Network Effects

Buyers of videogame consoles want games to play on; game developers pick platforms that are or will be popular

among gamers.

Cardholders value a credit card based on how this card is accepted by merchants;

Merchants will adopt a credit card that is popular among consumers.

Two-sided Market Platforms in industries such as software, portals and

media, payment systems and the Internet, must address the celebrated “chicken-and-egg problem” and endeavor to “get both sides of the market on board.”

They have to choose a proper price structure, not simply a price level.

Two-sided Market The second feature involves interesting price

discrimination. For instance, an intermediary may subsidize one

side in order to attract the other side. Intuitively, platforms often treat one side as a

profit center and the other as a loss leader, or, at best, as financially neutral.

Discount Coupons Merchants Buyers Discount coupons Who are the buyers?

Newspaper

MC = MR

What is the Marginal cost ?

$7 and $8 dollar per copy

Interactions between Circulation Market + Advertising Market

Comparison with Metro

Two-sided Market

Meeting Place: 2 EQm : (Go, Go), (Not, Not)

Socially Best: (Go, Go)

PayoffGirl

Go Not

BoyGo 5,1 -1,0

Not 0,-1 0,0

Two-sided Market Chicken-egg problem

Coordination Problem

E.g. Match Maker Assume: Monopoly match maker + Entry fee The match maker can charge Entry Fee to

BOTH sides

Girl

Go Not

BoyGo 5, 1 -1, 0

Not 0, -1 0, 0

E.g. Match Maker The match maker maximizes its profit:

Charging PB for boys and PG for girl.

Girl

Go Not

BoyGo

5-PB, 1-PG

-1-PB, 0

Not 0, -1-PG 0, 0

We know that PB<5, PG<1

Suppose that PB, PG >0, there will be a Chicken & Egg problem (2 Eqm)

Solution: make one side come!

E.g. Match Maker Assume: PG* = -1-e (e=a very small +ve

nubmer)

Girl

Go Not

BoyGo 5-PB, 2+e -1-PB, 0

Not 0, e 0, 0

Girl’s dominant strategy is ‘Go’ – girl must come!

PB =5,

Profit = PB + PG = 5-1-e = 4-e >0

Payoff: Boy: 5-PB = 0 Girl: 2+e >0

Implications In a two-sided market, there is a co-ordination

failure. However, a profit-maximizing matchmaker can

break the ‘Chicken & Egg’ problem by giving a subsidy to one side.

In terms of the profit maximizing point, one side is ‘Input’ for the other side.

The other side’s satisfaction can be captured by a matchmaker.

Which side will get subsidy? Question:

Which side should be treated as ‘Input’? Which side should get subsidy (negative price)?

This example: The boy has a larger satisfaction. Give subsidy to the girl side. Capture the boy’s satisfaction.

A monopoly matchmaker with Transaction fee

Charge both: Transaction fee Entry fee

Girl

Go Not

BoyGo 5, 1 -1, 0

Not 0, -1 0, 0

Competition among match makers

Entry fee: PG = -1-e, PB=0 Transaction fee: tB = 5, tG = 1

Girl

Go Not

BoyGo 5-PB-tB, 1-PG-tG

-1-PB, 0

Not 0, -1-PG 0, 0

A monopoly matchmaker with Transaction fee

Transaction fee on boy = 5, Transaction fee on girl = 1, Small Negative Entry fee, The monopolist can capture the whole surplus

from the match-making.

Two Competing Matchmakers

Matching place B

Girl

Go Not

BoyGo 9, 1 0, 0

Not 0, 0 0, 0

Matching place A

Girl

Go Not

BoyGo 4, 4 0, 0

Not 0, 0 0, 0

Two Matching Place How much can Place A earn if place A attracts

one side? tG=4 tB=4 Total Revenue is 8.

How much can Place A earn if place A attracts one side?

tB=9 tG=1 Total revenue is 10.

Place A is willing to pay up to 8 to attract one side. Place B is willing to spend up to 10.

Two Matching Place The amount of the total Surplus is important! A = 8, B = 10 As the total surplus is larger, a matchmaker

can spend more on buying the ‘Input’.

Girl gets 8+e subsidy from B and goes to place B. Boy gets zero subsidy and pays the transaction fee.

B’s profit is 10-8-e=2-e.