Two-Sided Market
A two-sided market is one in which a platform brings together two distinct groups of users who benefit from each other's participation.
What is Two-Sided Market?
Examples include payment cards (cardholders and merchants), marketplaces, and advertising-funded media. The value to each side depends on how many users are on the other side, so the platform must get both on board. A key feature is that the structure of prices between the sides matters, not just their overall level: one side is often subsidised. This means prices on one side need not reflect the cost of serving it, and regulating one side's price tends to change the other's, an effect known as the waterbed effect.
How it works
Economists Rochet and Tirole describe a market as two-sided when the platform can affect the volume of transactions by charging more to one side and less to the other. One source treats a mobile network as two-sided because it connects callers with people receiving calls; another treats telecoms networks as typically one-sided, with direct network effects. Both views appear in the regulatory literature.