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Divide and conquer in two‐sided markets: A potential‐game approach

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  • Lester T. Chan

Abstract

Network effects typically generate multiple equilibria in two‐sided markets. To overcome the methodological challenge of selecting an appropriate equilibrium, this article shows that many two‐sided market models are weighted potential games, and therefore, a refinement of Nash equilibrium justified by many theoretical and experimental studies, potential maximization, pins down an equilibrium. Under potential maximization, platforms often subsidize one side and charge the other, that is, divide and conquer. The primary determinant of which side to subsidize/monetize is cross‐side network effects. This divide‐and‐conquer strategy implies that platforms are often designed to favor the money side much more than the subsidy side.

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  • Lester T. Chan, 2021. "Divide and conquer in two‐sided markets: A potential‐game approach," RAND Journal of Economics, RAND Corporation, vol. 52(4), pages 839-858, December.
    • Handle: RePEc:bla:randje:v:52:y:2021:i:4:p:839-858
    DOI: 10.1111/1756-2171.12393
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    2. Ding, Rong & Ko, Chiu Yu & Shen, Bo, 2022. "Partial compatibility in two-sided markets: Equilibrium and welfare analysis," Economic Modelling, Elsevier, vol. 116(C).

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