A game console maker sells hardware at a loss and makes it up on games. A card network courts shoppers so hard that merchants have to accept its cards. These are not charity or folly; they are the logic of two-sided markets, where one side’s growth feeds the other.
Co-opetition and platforms
Business is not only rivalry. Complementors, firms whose products make yours more valuable, expand the whole pie, and platforms live or die on cross-side network effects. When demand, costs, or revenue differ across sides, low prices on one side can pull in the other and raise total profit.
A focal point helps players coordinate using something outside the...
A complementor is a firm whose product makes yours...
Predict, then play
Run a two-sided platform. Set a price to each side, and watch adoption, where each side grows with the other, and total profit.
Why did that happen?
Take a guess, then reveal the reason
On a two-sided platform, each side wants to be where the other side is: developers go where the users are, users go where the apps are. So growing one side raises the value of joining the other. A platform exploits this by subsidizing the side that is more price-sensitive or more pivotal, sometimes below cost, to build critical mass, then monetizes the side that will pay to reach it. Pricing each side to cover its own cost, as in a one-sided market, would leave the network stuck below the threshold where it takes off.
The real strategy
A platform serves two groups whose benefits depend on each other’s participation (cross-side network effects). The profit-maximizing prices are not cost-based per side; the platform balances the two, often charging one side little or nothing and recovering profit from the other. The classic examples are payment cards (courting cardholders, charging merchants), game consoles (cheap hardware, royalties on games), and app stores (a large cut from developers, free to users).
Adoption on each side rises with the other side’s size, so the two demands reinforce each other. Cutting one price can therefore raise participation on both sides. Whether a subsidy maximizes profit depends on asymmetries in price sensitivity, marginal cost, or revenue per participant. The displayed symmetric model shows the spillover but does not, by itself, make subsidization optimal.
Work it out
Separate the spillover from the profit claim
Start at equal prices of 50. Then test a price of -10 on side A and 70 on side B. Participation rises, including on B, which demonstrates the cross-side spillover. But total profit falls in this symmetric model, so the experiment does not establish that the subsidy is optimal.
Real console or payment-card examples add asymmetry: software royalties, merchant fees, different acquisition costs, or sharply different price sensitivity. Those extra primitives can make one subsidized side profitable for the platform as a whole. The strategic lesson is to optimize the full price structure, not to assume every two-sided market should subsidize someone.
Key idea
In two-sided markets each side grows with the other. When the sides differ in price sensitivity, costs, or revenue, a platform may profit by pricing one side low, sometimes below cost, and monetizing the other. The cross-side effect alone does not prove a subsidy is optimal.
Check yourself
Sources
- Brandenburger, A. M., and Nalebuff, B. J. (1996). Co-opetition. Doubleday.
- Rochet, J.-C., and Tirole, J. (2003). Platform competition in two-sided markets. Journal of the European Economic Association, 1(4), 990-1029.