How to gain traction in two sided markets

I like the single-player mode vs. multi-player mode analogy. That's a useful way to think about it.

I'm not sure if I'd consider Facebook's model to be two-sided, at least their startup model. I'd consider two-sided markets to be businesses like eBay or Airbnb.

I remember reading something on Airbnb (it might have been a Mixergy interview) and one of the takeaways for building a two-sided market is to employ promotional tactics that are not scalable. If I remember correctly, Airbnb went to New York City and started knocking on doors to drum up listings. Obviously, such a sales tactic at scale would be extremely expensive and prohibitive, but when starting out, you need that level of intimacy to get off the ground. I believe the other example from that article was a babysitting service where the founder went around town and plastered fliers where appropriate.

Another typical strategy is the "girls get in free" nightclub strategy. Although ultimately it might be possible to make money from the market itself, in the early days it's almost certainly the case that whichever side is harder to attract probably needs to get the service for free.

Two-sided markets and platform competition have been popular topics for microeconomic theorists since around the 2003 work of Rochet and Tirole[1] (IMHO, Tirole will win the Nobel Prize in the next 3 years). These two helped put together much of the generality left out of Baye and Morgan's 2000 paper[2] that looked at information gatekeepers on the Internet.

In the late 1990s and early 2000s, economists really began to look at the Internet (Hal Varian, Google's Chief Economist is probably the best example -- see his 1998 book "Information Rules"[3]). They tried to tackle issues like price dispersion in a homogeneous goods market on the Internet (that is, why does price dispersion still exist in an Internet market for a homogeneous good?) and other problems of consumer information heterogeneity, consumer search, and so on. Starting in early 2000, economists began to take interest to the "gatekeeper" model of Internet prices -- a website that would aggregate prices across online retail sites. "If a consumer just has to go to one site to become informed about all the prices in the market, then consumers can costlessly become informed about all the prices in the market by going to the gatekeepers site" many microeconomists said. This led many researchers to look into the model of fees charged by gatekeepers to retailers who wanted to have their prices posted on the site.

Eventually, Tirole et al realized a way to generalize the concept of a two-sided market by describing it as a platform where the owner of the platform receives revenue from two [or more] sources (i.e. buyers via advertising and sellers via gatekeeper fees), hence making the general distinction between a multi-sided market and the the classic supply/demand market model. Today multi-sided markets are used to model almost all forms of platform competition.

From my perspective, research on the economics of the Internet hit a bit of a slump in the late 2000s as [too] many economists instead focused on macroeconomic issues during the bubble, but has grown in interest quite a bit again over the last 3-5 years with the rise of social networking and similar app/mobile platforms. So much of this research relies on fundamental models of two-sided markets, that I encourage anyone curious about really hot microeconomic theory topics related to the Internet and start-up industry to dig into platform competition.

[1] Platform Competition in Two-Sided Markets, http://ideas.repec.org/p/ide/wpaper/654.html

[2] Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=215548

[3] Information Rules, http://www.amazon.com/gp/product/087584863X/