Matchmakers/Meeting Place

Two sides: Boys and Girls.

Chicken-Egg Problem





If boys come, girls follow.
If girls come, boys follows.
You must attract one side in order to attract the other
side.
How do you attract them?
What is your price scheme?
Acrobat PDF/ Reader, Writer






Two sides; readers and writers.
PDF program ‘matches’ between readers and writers.
The value of PDF writer depends on how many customers
have PDF reader.
The value of reader depends on how many customers have
writer.
PDF reader is free.
A high price for the PDF writer.
Mini case studies, Video Games





End users and game developers.
A platform cannot sell the console without games to play
on
A platform cannot attract game developers without selling
the console to end users.
You must attract both sides.
A very low hardware price and a high licensing
fee.
1.Shop
Merchant
Customer
3
Merchant discount 2
4. Bill/Pay
American Express
Discover
Diner Club
2
Acquirer
3
3
(Access fee set by the system)
2. Authorization 3. Settlement
2
Issuer
Streaming-media technology




The current competition is among the RealNetworks, and
Microsoft.
Clients side/ Server Side
RealNetworks offers clients, a basic, free client program.
They charges significant amounts on the server side
Portals and media



Advertiser/ Eyeballs
The business model of (non-pay) TV and to a large extent
newspapers has been to use viewers and readers as a loss
leader, who attract advertizers.
This business model has been adopted with a vengeance by
Internet portals, which have supplied cheap or free Internet
access as well as free content (share quotes, news, e-mail,
etc....) to consumers.
Two-sided Market

The 1st important feature: Network Effects




Buyers of videogame consoles want games to play on;
game developers pick platforms that are or will be popular
among gamers.
Cardholders value a credit card based on how this card is
accepted by merchants;
Merchants will adopt a credit card that is popular among
consumers.
Two-sided Market

Platforms in industries such as software, portals and media,
payment systems and the Internet, must address the
celebrated “chicken-and-egg problem” and endeavor to
“get both sides of the market on board.”

They have to choose a proper price structure, not simply a
price level.
Two-sided Market



The second feature involves interesting price
discrimination.
For instance, an intermediary may subsidize one
side in order to attract the other side.
Intuitively, platforms often treat one side as a
profit center and the other as a loss leader, or, at
best, as financially neutral.
Discount Coupons




Merchants
Buyers
Discount coupons
Who are the buyers?
Newspaper
 MC = MR
 What is the Marginal cost ?
 $7 and $8 dollar per copy
 Interactions between Circulation Market +
Advertising Market
 Comparison with Metro
Two-sided Market
Girl
Payoff
Go
Not
Go
5,1
-1,0
Not
0,-1
0,0
Boy

Meeting Place:


2 EQm : (Go, Go), (Not, Not)
Socially Best: (Go, Go)
Two-sided Market

Chicken-egg problem

Coordination Problem
E.g. Match Maker


Assume: Monopoly match maker + Entry fee
The match maker can charge Entry Fee to BOTH
sides
Girl
Go
Not
Go
5, 1
-1, 0
Not
0, -1
0, 0
Boy
E.g. Match Maker

The match maker maximizes its profit:

Charging PB for boys and PG for girl.
Girl
Boy
Go
Not
Go
5-PB, 1PG
-1-PB, 0
Not
0, -1-PG
0, 0



We know that PB<5, PG<1
Suppose that PB, PG >0, there will be a Chicken & Egg
problem (2 Eqm)
Solution: make one side come!
E.g. Match Maker

Assume: PG* = -1-e
(e=a very small +ve nubmer)
Girl
Boy
Go
Not
Go
5-PB, 2+e
-1-PB, 0
Not
0, e
0, 0

Girl’s dominant strategy is ‘Go’ – girl must come!
PB =5,
Profit = PB + PG = 5-1-e = 4-e >0

Payoff:



Boy: 5-PB = 0
Girl: 2+e >0
Implications




In a two-sided market, there is a co-ordination
failure.
However, a profit-maximizing matchmaker can break
the ‘Chicken & Egg’ problem by giving a subsidy to
one side.
In terms of the profit maximizing point, one side is
‘Input’ for the other side.
The other side’s satisfaction can be captured by a
matchmaker.
Which side will get subsidy?

Question:
Which side should be treated as ‘Input’?
 Which side should get subsidy (negative price)?

This example:



The boy has a larger satisfaction.
Give subsidy to the girl side.
Capture the boy’s satisfaction.
A monopoly matchmaker with
Transaction fee

Charge both:


Transaction fee
Entry fee
Girl
Boy
Go
Not
Go
5, 1
-1, 0
Not
0, -1
0, 0
Competition among match makers


Entry fee: PG = -1-e, PB=0
Transaction fee: tB = 5, tG = 1
Girl
Boy
Go
Not
Go
5-PB-tB, 1-PG-tG
-1-PB, 0
Not
0, -1-PG
0, 0
A monopoly matchmaker with
Transaction fee




Transaction fee on boy = 5,
Transaction fee on girl = 1,
Small Negative Entry fee,
The monopolist can capture the whole surplus from
the match-making.
Two Competing Matchmakers
Matching
place A
Go
Matching
place B
Girl
Go
Not
4, 4
0, 0
Boy
Girl
Go
Not
Go
9, 1
0, 0
Not
0, 0
0, 0
Boy
Not
0, 0
0, 0
Two Matching Place

How much can Place A earn if place A attracts one
side?



How much can Place A earn if place A attracts one
side?



tG=4
tB=4
Total Revenue is 8.
tB=9
tG=1
Total revenue is 10.
Place A is willing to pay up to 8 to attract one side.
Place B is willing to spend up to 10.
Two Matching Place





The amount of the total Surplus is important!
A = 8, B = 10
As the total surplus is larger, a matchmaker can
spend more on buying the ‘Input’.
Girl gets 8+e subsidy from B and goes to place B.
Boy gets zero subsidy and pays the transaction fee.
B’s profit is 10-8-e=2-e.