ABSTRACT: Many Internet intermediaries operate two-sided networks, that is, they provide platforms to bring together two types of participants, or "sides," 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 networks literature by endogenizing the level of network effects as the result of relevant investments by the intermediary, which determine the design of the network. 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.
Key words and phrases: intermediation, Internet platforms, network effect, two-sided markets, two-sided networks