Solving the Circular Conundrum: Communication and Coordination in Two-Sided Markets Daniel F. Spulber* Northwestern University October 2009 ________________________________ * Elinor Hobbs Distinguished Professor of International Business and Professor of Management & Strategy, Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL, 60208. Professor of Law (courtesy), Northwestern University School of Law, e-mail:
[email protected]. I gratefully acknowledge the support of a grant from Microsoft to the Searle Center on Law, Regulation, and Economic Growth. Prepared for the Conference on Maturing Internet Studies organized by James Speta, Northwestern University Law School. I thank participants of the conference for helpful comments, including Shane Greenstein, Bill Rogerson, and Jim Speta. Outline INTRODUCTION I. CROSS-MARKET BENEFITS A. MARKET THICKNESS EFFECTS B. VARIETY AND SCALE EFFECTS C. NETWORK EFFECTS II. CENTRALIZED COORDINATION BY REDUCING TRANSACTION COSTS A. STRATEGIC PARTICIPATION IN TWO-SIDED MARKETS B. SOLVING THE CIRCULAR CONUNDRUM BY FOSTERING DECENTRALIZED COORDINATION III. CENTRALIZED COORDINATION BY PROVIDING MEDIA CONTENT AND CONSUMER REWARDS A. SOLVING THE CIRCULAR CONUNDRUM THROUGH CONTENT AND CONSUMER REWARDS B. THE CIRCULAR CONUNDRUM WITH COMPETING FIRMS IV. CENTRALIZED COORDINATION BY ACTING AS A MARKET MAKER A. THE CIRCULAR CONUNDRUM WITH MARKET MAKING FIRMS B. MARKET MAKING WITH MANY BUYERS AND MANY SELLERS C. MARKET MAKING WITH VARIETY AND SCALE EFFECTS V. CASE STUDIES