Matchmakers
The economics of multi-sided markets, from village markets to card networks.
Summary
Evans and Schmalensee provide the economics of multi-sided platforms in a form aimed at practitioners. Their subject is businesses that create value by bringing two or more distinct groups together and that must get both sides on board simultaneously, including payment cards, operating systems, shopping malls, advertising-supported media, marketplaces and dating services.
The analytical content covers the specific problems these businesses face. The chicken and egg problem requires a launch strategy that gets both sides at once, and they catalogue the methods: subsidise one side entirely, seed one side with owned inventory, focus on a narrow segment where both sides can be assembled, or use a single-sided product first. Pricing must be set across sides rather than per side, and the profit-maximising price on one side is frequently zero or negative, which means standard cost-based or margin-based pricing is wrong in a way that can destroy the business. Governance matters because the platform must set and enforce rules for participants, and the rules are part of the product. Winner-take-all outcomes are less common than assumed and depend on whether users multi-home and whether the network effects are local or global.
Schmalensee and Evans both worked as economic experts in platform antitrust cases, which shows in the treatment of competition questions and is worth knowing when reading their conclusions. The book is a practitioner synthesis of the academic literature, principally Rochet and Tirole. It predates the current regulatory turn against large platforms, and its treatment of market power is more relaxed than the current debate.
Key takeaways 7
- A multi-sided platform must attract both sides simultaneously, and the launch strategy is a different problem from the operating strategy.
- Prices must be set across sides jointly, and the profit-maximising price to one side is frequently zero or negative.
- Applying cost-based or margin-based pricing to each side separately destroys platform businesses that would otherwise work.
- Winner-take-all outcomes require that users cannot easily use multiple platforms, and multi-homing is common enough that most platform markets support several competitors.
- Network effects can be local rather than global, which means a platform can be dominant in one segment while a competitor holds another.
- Platform governance rules are part of the product, because participants join based on who else is admitted and how disputes are handled.
- The critical mass required for launch is usually reached by narrowing the initial market until both sides can be assembled within it.
Who should read it
Founders and investors building or evaluating marketplaces and platforms who need the pricing, launch and governance economics stated concretely.
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Where it sits in the reference 5
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