Question

Identify an example of a two-sided market where both sides pay for product or service. Secondly, Identify an example where only one side pays. What factors determine who should pay? Does paying have implications for the establishment and growth of a network effect? What might a firm do to encourage early network growth? Please make sure you answer all parts of this question.

Answer 1

Two-sided market:

Two-sided markets are economic platforms having two distinct user groups that provide each other with network benefits. Two-sided networks can be found in many industries, sharing the space with traditional product and service offerings. Some of the examples of two-sided markets include Credit Cards, Operating Systems, yellow pages, recruitment sites, search engines. Examples of well known companies employing two-sided markets include organizations such as American Express (Credit Cards), eBay (Marketplace), Facebook (Social Medium), LinkedIn (Professional Medium), Match.com (Dating Site), monster.com (recruitment platform) and Sony (game consoles)

One-Sided Market:

One-sided markets can be volatile and very stressful for market makers. Market makers are obligated to facilitate trading stocks even if doing so is inconvenient or less profitable.

For example, it can also be very profitable for market makers: If everybody wants to buy the stock and the market maker is the only one selling, the market maker is likely able to sell the shares for a very high price in this type of one-sided market. This means that investors will likely pay a very high price.

Example: An automobile company ABC that has been researching the means to drive a car in Auto-pilot mode. After 15 years of research, it makes a discovery that enables them to drive a car in auto-pilot mode without crashing. This is a revolutionary discovery in the automobile world and because it is patented. ABC will be the only supplier of auto-pilot cars.

Accordingly, every investor would want to buy the shares of ABC and nobody would want to sell. This creates

The factors that determine who should pay are – Demand and Supply, Novelty, Market Conditions, Economic and political conditions of both buyer and seller.

Network Effect:

A network effect is a positive effect described in economics and business that one additional user or consumer of a good or service has on the value of that product to the rest of the consumers. When a network effect is present, the value of a product or service increases based on the number of people using it.

The network effect can create a bandwagon effect as the network becomes more valuable and more people join, resulting in a positive feedback loop.

Network effects become significant after a certain subscription percentage has been achieved called critical mass. At the critical mass point, the value obtained from the good or service is greater than or equal to the price paid for the good or service. A key business concern must be how to attract users prior to reaching critical mass. Some of the ways to rely on critical mass is extrinsic motivation, such as a payment, a fee, or a request for friends to sign up.

Network effects are commonly mistaken for economies of scale, which result from business size rather than interoperability. Classical economies of scale are on the production side, while network effects arise on the demand side.

References:

http://www.investinganswers.com/financial-dictionary/stock-market/one-sided-market-6790