The Evolution of Two-Sided Markets: A Dynamic Model

Abstract

Static models of two-sided markets often lead to multiple equilibria as a result of increasing return to demand. Typically the market can be monopolistic or oligopolistic in equilibrium. We provide a simple dynamic model to address the equilibrium selection problem. Our results indicate that the final market structure depends critically on the overall strength of the indirect network effects of the two sides. Interestingly, we find under weak network effects the market share advantage of the leader diminishes over time. Simulating our model under the monopoly conditions also suggests that time until dominance follows a power law distribution, and as a result the probability that monopoly does not occur for an extended period is not trivial. We then discuss the implications of our results for intermediaries.