Design and Ownership of Two-Sided Networks : Implications for Internet Platforms

Many Internet intermediaries operate two-sided networks, that is, they provide platforms to bring together two types of participants, or quot;sides,quot; such as buyers and sellers. This paper develops a model that characterizes the intermediary's pricing in two-sided networks, the value created by these networks, and the allocation of that value across the two sides. It extends the two-sided net-works literature by endogenizing the level of network effects as the result of re-levant investments by the intermediary, which determine the design of the net-work. It shows that under certain assumptions about the available technologies, the design of the two-sided network is highly asymmetric independent of its ownership structure. The paper provides insight into design strategies for Internet platforms, and it discusses their welfare implications