Divide and Conquer in Two-Sided Markets: A Potential-Game Approach
36 Pages Posted: 19 Dec 2019
Date Written: December 3, 2019
Strong network effects typically lead to multiple equilibria in two-sided markets. To overcome the methodological challenge of selecting an appropriate equilibrium, this paper shows that many two-sided market models are weighted potential games, and thus potential maximization, a refinement of Nash equilibrium justified by many theoretical and experimental studies, can always select a unique equilibrium. Under potential maximization, platforms often subsidize one side and charge the other, i.e., divide and conquer. The fundamental determinant of which side to subsidize or 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.
Keywords: two-sided platforms, potential games, potential maximization, divide and conquer, equilibrium selection, network effects
JEL Classification: D85, L12, L13
Suggested Citation: Suggested Citation