Abstract: Many Internet intermediaries operate two-sided networks, that is, they provide platforms to bring together two types of participants, or "sides," such as buyers and sellers. This paper develops a model that characterizes the intermediary’s pricing in two-sided networks, the value created by these networks, and the allocation of that value across the two sides. It extends the two-sided net-works literature by endogenizing the level of network effects as the result of re-levant investments by the intermediary, which determine the design of the net-work. It shows that under certain assumptions about the available technologies, the design of the two-sided network is highly asymmetric independent of its ownership structure. The paper provides insight into design strategies for Internet platforms, and it discusses their welfare implications. 

Insights: Many dominant Internet firms, like Google and Facebook, operate platforms interconnecting diverse stakeholders, like users, advertisers and application developers. While previous economic and IS research focused on platform pricing strategies, this article shows the significance and value of platform design strategies.

Keywords: platforms, platform design, two-sided networks, two-sided markets, network effects, networks, ownership, investment, endogenous network effects, intermediation, B2B electronic marketplaces

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