Network effects in online two-sided market platforms: A research note

Many online platforms show characteristics whereby two groups of agents – the buyers and the sellers – come together and interact with one another via the enabling platform. The benefit that accrues to a member of either group depends on both the number of agents within each group and the extent of competition between the sellers for the buyers. We present a model to analyze such interactions. The results imply that if two platforms are relatively undifferentiated, trying to increase the cross-group network benefits for the buyers can be counter-productive. Instead, the platforms should first try to increase their relative differentiation, which then allows them to charge higher prices relative to the other platform. The results have particular significance in the online world, where the erstwhile strategy of many platforms that seem relatively undifferentiated from the consumers' perspective has been to increase the cross-group network benefits.