Modelling the Rise and Fall of Two-sided Markets

Two-sided markets disrupted our economies, reshaping markets as diverse as tourism (airbnb), mobility (Uber) and food deliveries (UberEats). New market leaders arose leveraging on platform-based business model, questioning well-established paradigms. The underlying processes behind their growth are non-trivial, inherently microscopic, and leverage on complex human interactions. Platforms need to reach critical mass of both supply and demand to trigger the so-called cross-sided network effects. To this end, platforms adopt a variety of strategies to first create the market, then expand it and finally successfully compete with others. Such a complex social system with many non-linear interactions and learning processes calls for a dedicated modelling approach. State-of-the-art methods well estimate the macroscopic equilibrium conditions, but struggle to reproduce the complex growth patterns and individual human behaviour behind. To bridge this gap, we propose the microscopic S-shaped learning model where agents build their perception on the new service with time, affected by both endogenous (service quality) and exogenous (marketing and word-of-mouth) factors cumulated from experiences. We illustrate it with the case of two-sided mobility platform (Uber), where the platform applies a series of marketing actions leading to rise and then fall on the market where 200 drivers serve 2000 travellers on the complex urban network of Amsterdam. Our model is the first to reproduce not only behaviourally sound, but also empirically observed growth trajectories, it remains sensitive to a variety of marketing strategies, allows reproducing the competition between platforms and is designed to be integrated with machine learning algorithms to identify the optimal market entry strategy.