Making sense of Internet Platforms: Network Effects and Two Sided Markets

It seems like the quickest way to make a billion dollars at the moment is to create a successful internet platform. Companies like Facebook, eBay, Airbnb, Twitter and Paypal are platforms that have gone from obscurity to internet giants in a matter of years. So what are these platforms and how are they making so much money? A lot of starry-eyed tech entrepreneurs wax lyrical with theories that equate the technology revolution to a revolution in business and economics. But the typical way an internet platform makes profit is by acting as a two sided market, which is a type of business that existed long before the internet.

Two sided markets are naturally able to thrive at huge scales and platforms have been taking advantage of this, attaining unbelievable valuations. It is useful to view internet platforms through the lens of a two sided market because it explains the incentive structure of the platform and how the companies orient themselves in terms of product decisions. Continue reading