Two-sided markets model and its applications

The phenomenon that good companies go bad has been observed in many different industries and been studied by a lot of researchers. In this thesis, we show that most of the companies that go bad have a value chain business model, and the two-sided markets model can help a market leader to increase the entry barrier for new entrants. In a two-sided market, two groups of users interact with each other through a common network platform and the value derived by one participating group depends on the number of participants in the other group. A lot of business models in seemingly different industries fall into this category. For example, payment cards, online auction, PC operating systems, game console, etc. A key characteristic of a two-sided markets model is the positive cross network effect between the two sides of the platform. We demonstrate that the positive cross network effect possessed by a two-sided markets model can help a market leader with a two-sided markets model to maintain its leadership. In our research, we analyze two different types of business models: the value chain model and the two-sided markets model. We show that a general business model can be considered as a combination of a pure value chain model and a pure two-sided markets model, and we can put a general business model into three different categories based on the strength of the positive cross network effect. We build a mathematical model to model the two-sided markets model and the value chain model. Through the theoretic model analysis and simulation, we demonstrate the advantage of the two-sided markets model. Then we use case studies of well known companies in the IT industry to support our arguments. We also recommend that a company with a value chain model should introduce two-sided markets component through two-sided markets platform innovation, and a company that already has a two-sided markets model can keep creating new two-sided markets platforms through two-sided markets platform innovation by leveraging its existing user base.;We apply the two-sided markets model to analyze the search engine market and derive some insights from that. Google has been very successful in becoming the dominant search engine platform in the US and Western countries. In contrast to its success in the US and Western countries, Google does not have much luck in some Asian countries such as China and Korea. Google is far behind in terms of search market share in China and Korea. We model the search engine market as a two-sided markets model and analyze the industry structure and competition of the search engine market. We use the model to analyze the search engine history and explain why multiple search engines could co-exist in the early days of the search engine history. We also explain how Google, a latecomer in the search market, could become the leading search engine, and how Google has strengthened its leading position. Then we apply the model to China and Korea's search markets and analyze how Google could lose the game to local search companies. In the end, we propose some strategies on how search engine market leaders could maintain and strengthen their leading positions.;In the two-sided markets literature, people believe that the user group on either side of the platform is homogeneous, and the platform with a larger user base has an advantage in the market. Our research shows that the user group of a two-sided markets platform may not be homogeneous, and the late comer can leverage on the non-homogeneity to achieve competitive advantage over the incumbent or first mover. In this thesis, we study the competition of MySpace and Facebook, the two most popular social network sites. Facebook, a latecomer compared with MySpace, adopted a different growth strategy, by focusing on college students at the beginning. Then it opened its site to high schools, companies, and everyone else after it had established a strong foothold in colleges. Facebook finally surpassed MySpace and became the leading social network site. In our study, we model the social network site as a two-sided markets model in different scenarios and explain its growth dynamics. We point out that the users group of a social network site is not homogeneous. The number of a user's off network friends who are on the social network site, instead of the total size of the network, determines the value the user can derive by joining the social network platform. The more off network friends on the social network site, the more value a user derives by joining the social network site. The user group of a social network site is composed of a number of smaller clusters, and there are more friend connections within each cluster. A college is such a cluster. Through the model analysis and simulation, we show that Facebook could easily achieve competition advantage over MySpace at college campus even though it cannot compete with MySpace in a general market. This helped Facebook to establish a strong foothold at college campus first and then surpassed MySpace eventually.