Limitaciones

Setting prices and possible discounts with respect to the two sides of a network is no simple affair. Obviously, the choices made by the platform provider can have a huge impact on the growth of the network, both in terms of number of users on each side and derived value. A key contribution of a two-sided

network model is determining which side receives a discount. Different firms choose different beneficiaries, depending on the industry in question and the characteristics of the two groups of users involved. Parker & Van Alstyne (2005) argue that this depends on cross-price elasticities as well as the rela-tive sizes of the two-sided network effects. Also Evans & Schmalensee (2008) acknowledge that prices on one side of the market may be below marginal cost and possibly negative in long-run equilibrium. Moreover, they argue that the percent markup of price over marginal cost is not inversely related to the elasticity of demand for either customer group, as would be the case in many traditional markets.

Willingness to pay on each side must be considered carefully, as poor choices can lead to stagnation of the network. Often it is the case that there is a “subsidy side” that the platform provider chooses to subsidize in order to attract users to that side in large numbers, the reason being that these users in high volumes are valued by the other side of the network, namely the “money side”. In other words, having a large number of users on the subsidy side is crucial to developing strong positive cross-side network effects to attract users to the money side. To encourage this development, the platform provider charges users on the subsidy side less than they would be charged in the case that they represented an independent market, hence the usage of the term subsidy. Ultimately, these subsidies are paid for by the money side users (e.g., merchants, publishers, developers, etc.), who value the high number of addressable users on the subsidy side so much that they’re willing to pay the platform provider a premium to gain access to them via the platform.

(Eisenmann et al., 2006)

For example, in streaming video, portable documents, and advertising, to sub-sidize content consumers and charge content developers is the industry norm.

Operating systems and multiplayer games are an example to the opposite in which content developers receive subsidies and consumers pay to join the net-work. It is important to recognize that in the case of content providers and end consumers, either market can be a candidate for discounting or free give-aways. Deciding which market to subsidize depends on the relative network externality benefits. At a high level of externality benefit, the market that contributes more to demand for its complement is the market to subsidize.

At lower levels of externality benefit, platform providers may charge positive prices in both markets but keep the price on one side artificially low by dis-counting it (Parker & Van Alstyne, 2005). This is also in line with the research of Armstrong (2006) which identifies three factors that determine the structure of prices offered to the two groups:

• Relative size of cross-group (cross-side) externalities. If a member of group 1 exerts a large positive externality on each member of group 2,

then platforms will aggressively try to persuade group 1 to join them. In general terms but especially in competitive markets, it is group 1’s ben-efit to the other group that determines group 1’s price, not how much group 1 benefits from the presence of group 2. Furthermore, positive cross-group externalities act to intensify competition and reduce plat-form profit, unless they act to tip the industry to monopoly.

• Fixed fees or per-transaction charges. Platforms providers may charge for their services on a fixed, lump-sum basis, so that a user’s payment does not explicitly depend the platform’s performance on the other side of the market. An alternative scheme is that the payment is an explicit function of the platform’s performance on the other side. The major dif-ference between the two charging bases is that cross-group externalities are weaker with per-transaction charges, since the total cost of transac-tions with users on the other side increases with each new transaction, eroding the total benefit gained from those transactions. Because exter-nalities are lessened with per-transaction charging, it is plausible that platform profit is higher when this form of charging is used, except in the case of monopoly platforms. The distinction between the two forms of tariff only makes a difference when there are competing platforms, not in a monopoly situation.

• Single-homing or multi-homing. A user is said to “single-home” when he or she chooses to use only one platform for a specific purpose. In contrast, when the user has joined multiple competing platforms, he or she is “multi-homing”. Multi-homing can occur on either side of the market, or on both sides. (Multi-homing is discussed in more detail in Section 2.4.7.)

In a two-sided market, the attraction between the two groups of users typi-cally works both ways, as having a greater number of money-side users (who typically provide the goods, content, or services that subsidy-side users are in-terested in) indeed attracts even more subsidy-side users to the platform, cre-ating a virtuous circle though a positive feedback loop. The platform provider, exercising pricing power on both sides of the market, has to find the delicate balance between subsiding one side and demanding premium from the other side.

Understanding the price sensitivity of users on each side plays a crucial role here. Typically, end users or consumers are much more price sensitive than content publishers, and therefore, the former group of users are subsidized while the latter do not mind paying charges so much. As already noted, however, each case and pair of user groups must be evaluated on an individual basis.

User sensitivity to quality is another point to consider in choosing the side to subsidize. Eisenmann et al. (2006) state that the side that must supply sufficient quality is to be charged, through royalties and/or other kinds of transaction-based or fixed fees, whereas the side that strongly demands qual-ity is to be subsidized. This can also be interpreted as increasing the barriers to entry on the money side, as the suppliers must have good enough sales prospects to be able to offset their fixed costs. For suppliers to have rea-sonably good sales prospects, they usually have to be serious about quality.

Using mobile game development as an example, developers often have to pay a one-time registration fee to gain access to the development tools and/or mar-ketplace. Additionally, they typically have to share a fixed portion of their revenue from titles sold through the marketplace. Moreover, some mobile application marketplaces require that applications be thoroughly tested and vetted by the marketplace owner before they can be admitted to the catalog.

The combined cost and effort of developing and bringing applications to the market acts as a deterrent to unscrupulous developers seeking to make quick money through poor quality applications. On the other hand, too stringent, costly, and/or tedious policies set by the platform provider may put off some typically smaller developers and thus limit diversity and innovation in the ap-plication catalog. Mobile apap-plication stores are examined in more detail later in this section.

Output cost or the incremental cost of each added subsidy-side user to the platform provider needs to be considered when deciding the extent of the subsidies provided. When this cost is negligible, subsidy decisions are more straightforward. This is the case with digital goods such as software applica-tions and downloadable content. Also, when the platform provider has plenty of idle server capacity or storage, adding more users to the network is cheap.

In contrast, when the subsidized giveaways take the form of physical goods such as computers, handsets, or other electronic equipment, risks to the plat-form provider are much higher and can materialize in substantial losses, should the money-side users not provide enough revenue to cover the subsidy costs.

(Eisenmann et al., 2006)

As already discussed, two-sided networks often exhibit positive cross-side net-work effects, and thus adding users on either side positively impacts growth on the opposite side. Sometimes, however, excessive growth of one side can be a negative development for users on that side, in which case the network is said to exhibit negative same-side network effects. This is most often due to rivalry either on the supply side (too many sellers may introduce downward pricing pressure) or demand side (too many buyers fighting over a scarce supply of goods). Under such circumstances, Eisenmann et al. (2006) suggest that plat-form providers consider granting exclusive rights to a single supplier in each transaction category and extracting high rent for this concession. Exclusivity

is not without problems though, and the platform provider must therefore en-sure that sellers do not abuse their monopoly positions, which in turn would have buyer-side repercussions.

Eisenmann et al. (2006) recognize that users’ brand value can be an important determinant of growth in two-sided markets. The participation of so called

“marquee users” can be crucial for attracting users to the other side of the network. Often these marquee users are high profile suppliers or exceptionally big buyers. For a platform provider, they present an opportunity to accelerate the growth of its network, especially in the case of exclusive arrangements, i.e., agreeing that the marquee users do not join rival platforms. Such arrangements can be quite costly, however, especially so for smaller platform providers that have limited bargaining power. Conflict over the division of value between platform providers and large (marquee) users are common, especially when the large users’ role is critical in mobilizing the network in the first place.

Finally, it is important to recognize that two-sided network pricing follows a different set of rules and logic than conventional business. No matter what the merits of the platform, failing to set prices and subsidies accordingly can ruin the business.