What is a Two-Sided Market?

A two-sided market, also known as a two-way market or a two-sided network, serves the market originator in a dual capacity. It provides the market maker with the potential to benefit as a giver and receiver. In a two-sided market, the individual or business is lined up on both sides of the transaction, allowing them to both buy and sell in the transaction. Both user groups benefit fully from the business transaction and have a highly vested interest in each side.

Market makers in a two-sided market can be customers or businesses and must be willing or prepared to both buy and sell at the predetermined prices that were quoted. In other words, a business can make an offer to consumers and then also provide resources to help the consumer in that relationship. Health organizations who act as both health insurance carriers for patients and provide health care are participating in a two-sided market. In this situation, the organization benefits by insuring the patient but it also receives its own health insurance payout since it provides the patient care as well.

Another example of a two-sided market involved credit card companies. Major credit card companies may simultaneously help merchants so they may accept credit card payments while providing cardholders with the credit and plastic credit cards so they may transact with merchants using their credit cards. In this case, the credit card company benefits from helping both sides of the market.

Although the two-way market is profitable, it does not come without challenges. One common challenge that it faces is the potential for the industry to increase its bid price on one side of the equation and decrease their ask price on the other side of it. Doing this can make it tricky for the business acting as a two-sided market and should be guarded against to protect their profits. In other words, if travel businesses operating in this capacity increase their travel rates, they may find that there is also a decrease with consumers who are unwilling to travel due to the spikes in travel fees. To offset this possibility, businesses would do well to thoroughly analyze their market, finding available opportunities for increases that will not negatively impact their profits and carefully introducing market strategies to both sides of the market.