Basic introduction to "Business Platforms" as two-sided markets; prepared for FabAcademy 2011

1. Business Platforms
Peter Troxler

2. …Platform…
Encycloædia Brittannica 1911
Photo © 2008, Martin L aka EuroMagic, cc-by 2.0
a raised flat structure or
stage, (…) from which
The earlier uses of speeches, addresses,
the word, such as lectures, &c., can be
for a plane delivered.
geometrical figure, Similar structures are used in
the ground plan of railway stations to have easy
a building, and access to the carriages;
figuratively, for a and in fortification the word is
plan, design, used of the raised level
scheme, &c., are surface on which guns are
now obsolete. mounted.

3. …Platform…
Photo © 2009 by Mike Baird, cc-by 2.0 Photo © 2011 by Creative Tools, cc-by 2.0

4. …Platform…

5. Business Platform
• an intermediary between two or more sides of a
market (Wikipedia)
• Two-sided market =
– two distinct user groups
– provide each other with network benefits
• Examples:
– credit cards: cardholders and merchants;
– HMOs: patients and doctors;
– operating systems: end-users and developers;
– travel reservation services: travelers and airlines, hotels,
etc.;
– yellow pages: advertisers and consumers;
– video game consoles: gamers and game developers;
– communication networks

6. sumers want producers before either prefers a new to other content-providing firms if effective consumer
format. demand rises instead of falls.
An incumbent firm producing content for one for- Consider, finally, a third participant, the focus of
mat probably does not welcome entry by a com- our attention here, who produces tools to support
More Examples
peting firm producing similar content if there is no both content creators and end consumers. These
profitable exchange between them. This mitigates a are “platform” intermediaries. Examples in Table 1
network effect within one side of the market. Buyers include Sun, Apple, and Microsoft, who support soft-
in the end-consumer market, however, welcome entry ware developers as well as private and business
Table 1 Two-Sided Market Examples
Product category Market 1 Intermediary Market 2
Portable documents Document reader Adobe Document writer
Credit cards Consumer credit Issuing bank Merchant processing
Operating systems Complementary applications Microsoft, Apple, Sun Systems developer toolkits
Plug-ins Applications software Microsoft, Adobe Systems developer toolkits
Ladies’ nights Men’s admission Bars, restaurants Women’s admission
TV format Color UHF, VHF, HDTV Sony, Phillips, RCA Broadcast equipment
Broadcast & publishing Content Magazine publishers, TV, Advertisements
radio broadcasters
Computer games Game engine/player Ubisoft, ID, valve, electronic arts Level editors
Auctions Buyers E-Bay, Christie’s, Sotheby’s Sellers
Academic journals Articles Management Science Author submissions
Recruiting Applicants Monster.com Employers
Reservation systems Travelers Expedia, Travelocity, Orbitz Hotels, airlines, rental cars
Shopping malls Shoppers Mall of America Stores
Streaming audio/video Content Real audio, Microsoft, Apple Servers
Paid search Searchers Google.com Marketers
Stock exchange Equity purchasers NYSE, NASDAQ Listed companies
Home real estate Home buyers Real estate agents Home sellers
Notes. This table shows how one side of a two-sided network market receives a discounted, free, or even subsidized good (indicated with ). In general
though not always, Market 1 can be interpreted as the user/consumer market and Market 2 can be interpreted as the producer/developer market. We provide
a test for which side receives the free good below.
Parker and Van AlstyneElectronicTwo-Sided Network Effects Management Science 51(10), pp. 1494–1504
(2005): copy available at: http://ssrn.com/abstract=1177443
available online at http://ssrn.com/abstract=1177443

7. Business Platform
1 2
Platform

8. Network Effect
Value of the Network
(Metcalfe’s Law) Vj = n2 * p
V: Value of Network
n: number of participants (nodes, end points)
p: some constant
(Beckstrom’s approach) Vj = ∑i,j(∑Bi - ∑Ci)
V: Value of Network j
∑B: benefit value of all transactions
∑C: cost of all transactions
Illustration by Derrick Coetzee

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Verdier, M. (2006). Retail Payment Systems: What can we Learn from Two-Sided Markets? MPRA Paper
No. 2606. Available at: http:// mpra.ub.uni-muenchen.de/ 2606/

10. Pricing
Price
+∆V
VA
(1-σ) VA
NU +∆U +∆U Quantity
Parker, G., Van Alstyne, M (2005). Innovation Through Optimal Licensing in Free Markets and Free
Software. Woprking Paper. Available at: http://ssrn.com/abstract=639165
Figure 2: A fraction, σ, of the original platform value, VA is made freely available, leaving direct
platform profit of (1 − σ) VA . Opening the platform permits developer enhancements, which add