Which came first, the chicken or the egg? Photograph by jangrk

You might have heard this phrase before. It is a very common, yet very difficult question to answer. As abstract as it sounds, and yet we met such cases almost everywhere in our lives. Would you, as a consumer, visit a mall that has very limited amounts of tenants who offers the product you need? On the other hand, would you, as a seller, open a store in a mall that has very limited amounts of visitors who might be interested to buy your products?

This kind of problem is commonly known as Two-Sided Market. It is a condition where the market has two different sided, and each side benefits from the other side mutually. Did you know that Sony loses money everytime they sell their Playstation? At first, it might not made any sense. How can Sony run such business and still survives? Why should they do it anyway if they lose money? The most rational thing to do is to cease the product instantly right? Well, you're not seeing the whole market. In Sony Playstation case, the two-sided market consists of gamers and game developers. Gamers benefit from the vast variety of game available in the market; plenty of games they could play (After all, it's the reason they bought the console, right?) Game developers, on the other hand, benefit from crowded market as their target; logically they would choose to develop their game for game consoles which has the most players. At this point, classic chicken-or-egg problem arise. How do you find the equilibrium to balance each sides?

Sony implements a smart strategy by subsidizing one side. In this case, Sony subsidize gamers purchasing Playstation by selling it in the retail price lower than the manufacturing cost, which in return costs Sony for each console they sold. The question is, how do they make profit at all? Sony charges expensive fee for game developers to obtain SDK (Software Development Kit) and publishing their games. As far as I know, the SDK itself costs around $8,000 - $11,000 depending on the agreement. This way, Sony made handsome revenue that covers their loss in their console sales. Another benefits of charging expensive fee to the game developers is they could maintain high-standard of the game quality, because small game developers would not be able to afford the fee just to try out the market; the investment they made is quite high, so they would make sure that the game they released is the best-quality they could produce.

Other example includes real-estate developers. The market involves house owners, and commercial property owners. House owners benefit if there are many commercial facilities (foods, retail stores, entertaintment, etc) available in the area. Deserted area would not interest many house owners afterall, because once they live there, it would be very inconvenient for them to travel just to eat or do other activities. On the other hand, commercial property owners are interested in the area with many house owners, because they're looking forward to run their business in the crowded area to achieve maximum revenue. In order to have sustainable ecosystem, equilibrium must be found between house owners and commercial property owners, and it's a difficult task for the real-estate developers.

There are many more cases where two-sided market could apply. There are many strategies too. Similar market could be tackled with many different strategies, depending on the market behaviour and many other variables. Any other strategy you could think of?