two-sided market

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pages: 270 words: 79,180

The Middleman Economy: How Brokers, Agents, Dealers, and Everyday Matchmakers Create Value and Profit by Marina Krakovsky

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Affordable Care Act / Obamacare, Airbnb, Al Roth, Black Swan, buy low sell high, Credit Default Swap, cross-subsidies, crowdsourcing, disintermediation, diversified portfolio, experimental economics, George Akerlof, Goldman Sachs: Vampire Squid, income inequality, index fund, Jean Tirole, Lean Startup, Lyft, Mark Zuckerberg, market microstructure, Martin Wolf, McMansion, Menlo Park, moral hazard, multi-sided market, Network effects, patent troll, Paul Graham, Peter Thiel, pez dispenser, ride hailing / ride sharing, Sand Hill Road, sharing economy, Silicon Valley, social graph, supply-chain management, TaskRabbit, The Market for Lemons, too big to fail, trade route, transaction costs, two-sided market, Uber for X, ultimatum game, Y Combinator

Thiers set out to build this bridge. Bridges as Two-Sided Markets * * * Lacking both experience and theoretical knowledge, she didn’t realize that the bridge she was trying to build had the interesting properties of what economists call a two-sided market. These days, two-sided markets (sometimes called two-sided networks or two-sided platforms) are everywhere because many of today’s Internet start-ups are middlemen businesses of exactly this type: whether you’re talking about connecting homeowners with guests (Airbnb) or drivers with fares (Lyft and Uber) workers with small jobs (TaskRabbit) restaurants with diners wanting take-out meals (GrubHub, Eat24) or doctors with patients (ZocDoc), you’re describing a two-sided market. At the same time, and maybe not coincidentally, the study of two-sided markets has become a popular field among academics, with many opinions about what counts as a two-sided market.

Because buyers usually want to be where sellers are, and sellers usually want to be where buyers are, a two-sided network with an abundance of participants on one side tends to attract more comers on the other side. In the language of economics—and increasingly of tech investors—two-sided markets usually create “indirect network effects.”36 As one side grows, the network becomes more attractive to the other side, and as the other side grows, it attracts more users who want to connect with that side. This positive feedback loop promotes rapid growth once you reach critical mass. That’s why tech investors love network effects. But this same growth curve means two-sided markets are extremely hard to get off the ground, as Thiers found out firsthand: how do you get a sitter to sign up for a service that doesn’t have a single parent, and likewise, how do you get a parent to sign up for a service that has no sitters?

Rather, it’s that without both sides on board, there is no service at all. If you want to open a gift shop—a middleman business that by most definitions is not a two-sided market—you lease your retail space, you buy some inventory from a wholesaler, and you’re ready to roll: a wholesaler won’t refuse your prepaid order because you have no customers yet. But if, on the other hand, your whole value proposition is access to your network, then if you have no network, you’ve got nothing. So how can you possibly begin? The typical way out of this chicken-and-egg problem is for the middleman to subsidize one side, thus getting these initial users to sign up before there’s anything on the other side. Even after a two-sided market takes off, with plenty of users on both sides and therefore the potential to charge both sets of users, middlemen usually continue to offer the service for free to one side while making all their money from charging the other side for access, relying on these cross-subsidies for continued growth and profit.

 

pages: 252 words: 73,131

The Inner Lives of Markets: How People Shape Them—And They Shape Us by Tim Sullivan

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Airbnb, airport security, Al Roth, Andrei Shleifer, attribution theory, autonomous vehicles, barriers to entry, Brownian motion, centralized clearinghouse, clean water, conceptual framework, constrained optimization, continuous double auction, deferred acceptance, Donald Trump, Edward Glaeser, experimental subject, first-price auction, framing effect, frictionless, fundamental attribution error, George Akerlof, Goldman Sachs: Vampire Squid, helicopter parent, Internet of things, invisible hand, Isaac Newton, iterative process, Jean Tirole, Jeff Bezos, Johann Wolfgang von Goethe, John Nash: game theory, John von Neumann, Joseph Schumpeter, late fees, linear programming, Lyft, market clearing, market design, market friction, medical residency, multi-sided market, mutually assured destruction, Nash equilibrium, Occupy movement, Peter Thiel, pets.com, pez dispenser, pre–internet, price mechanism, price stability, prisoner's dilemma, profit motive, proxy bid, RAND corporation, ride hailing / ride sharing, Robert Shiller, Robert Shiller, Ronald Coase, school choice, school vouchers, sealed-bid auction, second-price auction, second-price sealed-bid, sharing economy, Silicon Valley, spectrum auction, Steve Jobs, Tacoma Narrows Bridge, technoutopianism, telemarketer, The Market for Lemons, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, two-sided market, uranium enrichment, Vickrey auction, winner-take-all economy

The dense mathematics of his academic papers has served as a basis for regulatory policies on telecommunication networks. Tirole also applied himself to the question of how to regulate credit cards, which in turn led to a series of papers that aimed to understand two-sided markets more broadly: examining why they exist, what makes them different from the one-sided variety, and how competing platforms like Visa and Amex vie for customers on both sides of their respective markets, and providing some guiding principles for builders of two-sided markets and the authorities that regulate them. Much of Tirole’s work on platforms takes as its starting point that a two-sided market is one where participants on either side couldn’t simply find one another and strike a bargain in the absence of the platform standing between them.13 If they could, then they wouldn’t need the services of the platform.

It just wants to sell tickets to a lot of players and make sure the game is played on its turf.7 To do so, you have to ensure that the players you let onto the field actually enhance the platform’s value, so both sides stick around to play. (Think about the value proposition at eBay if conmen dominated its sellers’ ranks.) Looking at a two-sided market through this lens—as a space where people meet and not just where trade takes place—is a new angle to understanding exchange. The difference between one-sided and two-sided markets is subtle but meaningful. It changes the way that we might approach the market as a business or a consumer. And it affects how a regulator decides whether a platform can govern itself, or if there’s a need to step in to impose some rules on the businesses using the platform. The seemingly obscure rules of platforms have a great effect in your life.

The reason is, of course, because a bigger user base allows Google to extract ever-higher revenues from the other side of the market—the advertisers, who pay for search listings. In this case, stocking Google search results with more paid ads doesn’t do much to enhance the customer experience, so there’s a wide gap between what each side of the market pays to meet on Google. This state of affairs is entirely common in the realm of two-sided markets: many credit card companies don’t charge cardholders or even give them discounts, while merchants pay through the nose; shopping malls, a two-sided market from an earlier era, charge their tenants rent, while offering free parking and other inducements to attract shoppers. Sometimes the way that platforms charge can look perverse, until you understand the logic. Shopping malls charge their larger stores less money than smaller businesses because without those anchors to draw shoppers, the mall couldn’t exist.

 

pages: 421 words: 110,406

Platform Revolution: How Networked Markets Are Transforming the Economy--And How to Make Them Work for You by Sangeet Paul Choudary, Marshall W. van Alstyne, Geoffrey G. Parker

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3D printing, Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, Amazon Web Services, Andrei Shleifer, Apple's 1984 Super Bowl advert, autonomous vehicles, barriers to entry, big data - Walmart - Pop Tarts, bitcoin, blockchain, business process, buy low sell high, chief data officer, clean water, cloud computing, connected car, corporate governance, crowdsourcing, data acquisition, data is the new oil, discounted cash flows, disintermediation, Edward Glaeser, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, financial innovation, Haber-Bosch Process, High speed trading, Internet of things, inventory management, invisible hand, Jean Tirole, Jeff Bezos, jimmy wales, Khan Academy, Kickstarter, Lean Startup, Lyft, market design, multi-sided market, Network effects, new economy, payday loans, peer-to-peer lending, Peter Thiel, pets.com, pre–internet, price mechanism, recommendation engine, RFID, Richard Stallman, ride hailing / ride sharing, Ronald Coase, Satoshi Nakamoto, self-driving car, shareholder value, sharing economy, side project, Silicon Valley, Skype, smart contracts, smart grid, Snapchat, software is eating the world, Steve Jobs, TaskRabbit, The Chicago School, the payments system, Tim Cook: Apple, transaction costs, two-sided market, Uber and Lyft, Uber for X, winner-take-all economy, Zipcar

This makes the design of monetization models more complex, since the platform must ensure that the value it gives away to one side can be used to capture value on the other side. Significant scholarly work has been done in this area. Two of this book’s authors (Geoff Parker and Marshall Van Alstyne) were among the first scholars to lay out the theory of two-sided market pricing.2 And the theory was mentioned as part of the 2014 Nobel Prize awarded to one of the other originators of two-sided market economics, Jean Tirole.3 Achieving the right balance among the complex factors involved in two-sided market pricing isn’t easy. Netscape, one of the pioneers of the Internet era, gave away browsers for free in hopes of selling web servers. Unfortunately, there was no proprietary connection between browsers and servers that Netscape could reliably control. Anyone could just as easily use Microsoft’s web server or the free Apache web server, which meant that Netscape was never able to monetize the other side of its free browser business.

Research Network, September 12, 2012, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1676444. 2. Parker and Van Alstyne, “Internetwork Externalities and Free Information Goods”; Geoffrey G. Parker and Marshall Van Alstyne, “Two-Sided Network Effects: A Theory of Information Product Design,” Management Science 51, no. 10 (2005); Eisenmann, Parker, and Van Alstyne, “Strategies for Two-Sided Markets.” 3. Jean-Charles Rochet and Jean Tirole, “Platform Competition in Two-Sided Markets,” Journal of the European Economic Association 1, no. 4 (2003): 990–1029. 4. Rob Hof, “Meetup’s Challenge,” Businessweek, April 14, 2005, http://www.businessweek.com/stories/2005-04-13/meetups-challenge. 5. Matt Linderman, “Scott Heiferman Looks Back at Meetup’s Bet-the-Company Moment,” Signal v. Noise, January 25, 2011, https://signalvnoise.com/posts/2751-scott-heiferman-looks-back-at-meetups-bet-the-company-moment-. 6.

Were the differences a matter of random luck, or were deeper design principles at work? What are the rules of the new economics of networks? Geoff and Marshall set about trying to answer these questions. It turned out to be a harder challenge than they expected. They ended up having to develop a new economic theory of two-sided networks. Their Harvard Business Review article “Strategies for Two-Sided Markets,” coauthored with Harvard professor Thomas R. Eisenmann, laid out what became one of the most widely taught theories of Internet business, one that is still taught in MBA programs around the world. Along with the work of other scholars, Geoff’s and Marshall’s insights helped to reshape mainstream thinking about business regulation. Later, at the MIT Initiative on the Digital Economy, they furthered their work with such firms as AT&T, Dun & Bradstreet, Cisco, IBM, Intel, Jawbone, Microsoft, Salesforce, SAP, Thomson Reuters, and many others.

 

pages: 383 words: 81,118

Matchmakers: The New Economics of Multisided Platforms by David S. Evans, Richard Schmalensee

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Airbnb, big-box store, business process, cashless society, Deng Xiaoping, if you build it, they will come, Internet Archive, invention of movable type, invention of the printing press, invention of the telegraph, invention of the telephone, Jean Tirole, Lyft, M-Pesa, market friction, market microstructure, mobile money, multi-sided market, Network effects, Productivity paradox, profit maximization, purchasing power parity, ride hailing / ride sharing, sharing economy, Silicon Valley, Snapchat, Steve Jobs, Tim Cook: Apple, transaction costs, two-sided market, Uber for X, Victor Gruen, winner-take-all economy

“OpenTable Terms of Use,” http://www.opentable.com/info/agreement.aspx. 18. See Jean-Charles Rochet and Jean Tirole, “Platform Competition in Two-Sided Markets,” Journal of the European Economic Association 1, no. 4 (2003). As is increasingly common in academic economics, their paper was widely circulated several years before it appeared in print. The term “two-sided market” has fallen out of favor, as it has become clear that two- or multisidedness is an attribute of individual businesses, not necessarily of all businesses in a market. A nontechnical discussion of this paper and other early economic papers on multisided platforms is given by Richard Schmalensee, “An Instant Classic: Rochet & Tirole, Platform Competition in Two-Sided Markets,” Competition Policy International 10, no. 2 (2014). 19. In suburban America, they even give people free parking and, often, entertainment.

Then they had the insight that these businesses, and many others that look very different on the surface, have the same underlying business model. They all facilitate direct interactions between different types of customers. And they must use nontraditional, counterintuitive strategies to make money and survive. After working out a pioneering economic model, they wrote a paper, “Platform Competition in Two-Sided Markets,” which began circulating among economists in 2000.18 Economists now call these businesses multisided platforms because some of them actually facilitate interactions between more than two types of customers, as we will soon see. Jean Tirole received the Nobel Memorial Prize in Economic Sciences in 2014 for a number of important accomplishments, including his pioneering contributions to the new economics of multisided platforms.

Most consumers of ad-supported media, for example, pay little if anything and are provided content of significant value. Transaction cost: The economists’ term for frictions; see “Friction.” Turbocharged matchmaker: A matchmaker, or multisided platform, that benefits from a significant combination of powerful computer chips, the Internet, the web, broadband communications, programming languages and operating systems, and the Cloud. Airbnb, for example, benefits from all of these technologies. Two-sided market: The original name used to refer to industries that had “two-sided platforms.” Two-sidedness is a characteristic of businesses, not always of industries, however. Two-step strategy: An ignition strategy in which the platform secures significant participation by one group and then secures participation by the other group by offering them access to the first group. Advertising-supported media typically do this by securing eyeballs first and then selling access to them to advertisers.

 

pages: 302 words: 73,581

Platform Scale: How an Emerging Business Model Helps Startups Build Large Empires With Minimum Investment by Sangeet Paul Choudary

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3D printing, Airbnb, Amazon Web Services, barriers to entry, bitcoin, blockchain, business process, Clayton Christensen, collaborative economy, crowdsourcing, cryptocurrency, data acquisition, frictionless, game design, hive mind, Internet of things, invisible hand, Kickstarter, Lean Startup, Lyft, M-Pesa, Mark Zuckerberg, means of production, multi-sided market, Network effects, new economy, Paul Graham, recommendation engine, ride hailing / ride sharing, shareholder value, sharing economy, Silicon Valley, Skype, Snapchat, social graph, social software, software as a service, software is eating the world, Spread Networks laid a new fibre optics cable between New York and Chicago, TaskRabbit, the payments system, too big to fail, transport as a service, two-sided market, Uber and Lyft, Uber for X, Wave and Pay

Hence, the platform needs to figure out a model that incentivizes the harder side to join in. 5.On-Boarding Of Two Distinct Markets. On many platforms, producers and consumers may be two distinct markets. The same user may upload and view videos on YouTube but the traveler and driver markets, on Uber, are largely distinct. The typical user, on these platforms, plays only one of the two roles. Serving two-sided markets requires reaching minimum traction on both sides. Hence, two-sided markets require building two companies, often with completely different challenges, not just building two forms of behaviors among users. FIVE DESIGN PRINCIPLES FOR SOLVING CHICKEN-AND-EGG PROBLEMS With the above characteristics in mind, a solution to any chicken-and-egg problem relies on five key design principles: 1.Finding A Compelling Bait To Start The Loop.The first step in breaking a vicious cycle is to find an inorganic bait that attracts and hooks one of the two roles without the need for the other role being present.

Over time, the platform spilled beyond the initial use case to accommodate many different use cases. MAKE A TWO-SIDED MARKET ONE-SIDED The micro-market strategy works especially well when both production and consumption functions can be performed by the same target user. On Facebook, the same user creates and consumes content. On Yelp, the same user base would create and read reviews. The platform can target a single closed market and guarantee interactions. However, this does not work as easily for platforms that need two different markets to come on board. In such cases, the best solution to the problem of getting two different roles onto a platform is to find an existing community or group of potential users that already contains both roles. Etsy, a niche marketplace for arts and crafts, figured an elegant solution to this problem. Etsy is a two-sided market of buyers and sellers.

Facebook’s launch at Harvard University, and subsequently in similar closed markets, ensured that critical mass was reached a lot faster than the many Myspace copycats that were launching globally around that time. 4.Incentivizing The Role That Is More Difficult To Attract.Some user types may require more incentive to be pulled in. Acknowledging this is important, and is counterintuitive to the principles of traditional marketing. And finally, 5.Staging The Creation Of Two-Sided Markets.In general, the nature of two-sidedness only allows us to capture such markets one side at a time. However, we do observe exceptions in the strategies that follow. Finding the bait or incentive that brings in one role and enables them to remain while we get in the other role holds the key to succeeding with this model. OpenTable used this strategy to get restaurants on board by providing restaurant management software (the bait) before any consumers signed up.

 

pages: 318 words: 87,570

Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio by Sal Arnuk, Joseph Saluzzi

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algorithmic trading, automated trading system, Bernie Madoff, buttonwood tree, corporate governance, cuban missile crisis, financial innovation, Flash crash, Gordon Gekko, High speed trading, latency arbitrage, locking in a profit, Mark Zuckerberg, market fragmentation, Ponzi scheme, price discovery process, price mechanism, price stability, Sergey Aleynikov, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, transaction costs, two-sided market

Elimination of Stub Quotes The SEC did eliminate stub quotes, which were essentially placeholders for market makers that wanted only to quote one side of a market. Typically, stub quotes were placed far away from the market, often as low as one penny for a bid. For example, if a market maker wanted to place an offer to only sell stock, he would have to place a stub quote as a bid to create a two-sided market. When Accenture traded at $0.01 during the Flash Crash, the bid that was hit was a stub quote. According to the SEC Flash Crash report, “Executions against stub quotes represented a significant proportion of broken trades on May 6.”14 Eliminating stub quotes was a no-brainer in our opinion. What is needed, however, are more stringent market maker obligations. Currently, market makers need to quote within only 8% of the NBBO for most securities.

33 Kaufman was eerily prescient when he said in early autumn 2009, “Moreover, unlike specialists and traditional market-makers that are regulated, some of these new high frequency traders are unregulated, though they are acting in a market-maker capacity. They have no requirements to ‘maintain a fair and orderly’ market. They trade when it benefits them. If we experience another shock to the financial system, will this new (and dominant) type of pseudo market maker act in the interest of the markets when we really need them? Will they step up and maintain a two-sided market, or will they simply shut off the machines and walk away? Even worse, will they seek even further profit and exacerbate the downside?”34 Zero Hedge was relentless, publishing scores if not hundreds of posts in the year leading up to the crash criticizing HFT and the stock market and predicting a high-speed market meltdown. A few weeks before the crash, on April 16, 2010, I submitted a comment letter on the SEC’s Concept Release.35 I wrote that “Formal and informal market makers in the equities markets today have few or none of the responsibilities of the old dealers...firms shed responsibility for price continuity, quote size, meaningful quote continuity or quote depth...

Stocks would have to be traded by real market makers with obligations to supply capital at all times. These market makers would have affirmative and negative obligations. They would have to supply real liquidity, not phantom liquidity, and they should not interfere when the market is working without their assistance. 2. There must be minimum quote sizes based on the market cap of the stock and a minimum order life on all orders. 3. To reward market makers for creating a more stable two-sided market, there also needs to be a minimum spread that is wider than a penny. No doubt, our critics will claim that this alternative is going in the wrong direction. They will say it is a step backward and will bring back all the problems that we had with the old NYSE specialist and NASDAQ market maker systems. They will say that technology has moved us forward and made the markets more efficient.

 

pages: 375 words: 88,306

The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism by Arun Sundararajan

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3D printing, additive manufacturing, Airbnb, Amazon Mechanical Turk, autonomous vehicles, barriers to entry, bitcoin, blockchain, Burning Man, call centre, collaborative consumption, collaborative economy, collective bargaining, corporate social responsibility, cryptocurrency, David Graeber, distributed ledger, employer provided health coverage, Erik Brynjolfsson, ethereum blockchain, Frank Levy and Richard Murnane: The New Division of Labor, future of work, George Akerlof, gig economy, housing crisis, Howard Rheingold, Internet of things, inventory management, invisible hand, job automation, job-hopping, Kickstarter, knowledge worker, Kula ring, Lyft, megacity, minimum wage unemployment, moral hazard, Network effects, new economy, Oculus Rift, pattern recognition, peer-to-peer lending, profit motive, purchasing power parity, race to the bottom, recommendation engine, regulatory arbitrage, rent control, Richard Florida, ride hailing / ride sharing, Robert Gordon, Ronald Coase, Second Machine Age, self-driving car, sharing economy, Silicon Valley, smart contracts, Snapchat, social software, supply-chain management, TaskRabbit, The Nature of the Firm, total factor productivity, transaction costs, transportation-network company, two-sided market, Uber and Lyft, Uber for X, universal basic income, Zipcar

Varian and Carl Shapiro call this the “demand-side economies of scale” in their book Information Rules: A Strategic Guide to the Network Economy (Cambridge: Harvard Business Books, 1999). 23. See http://oz.stern.nyu.edu/io/network.html for more discussion of network effects. 24. Thomas R. Eisenmann, Geoffrey Parker, and Marshall W. Van Alstyne, “Strategies for Two-Sided Markets,” Harvard Business Review 96, 4 (2006): 581–595. https://hbr.org/2006/10/strategies-for-two-sided-markets. 25. Of course, there may be other traditional economies of scale that could lead to the eventual dominance of one or two firms because of several circumstances—by getting drivers to sign on and retaining them; or learning by doing in launching in a new market; or learning by doing in dealing with local regulators. 26. A transcript (from panel 4) of the workshop, titled “The ‘Sharing’ Economy: Issues Facing Platforms, Participants, and Regulators,” is available at https://www.ftc.gov/system/files/documents/videos/sharing-economy-workshop-part-4/ftc_sharing_economy_workshop_-_transcript_segment_4.pdf.

This is because unlike local transport, short-term accommodation is sought primarily by travelers rather than by local residents. You favor a platform that can get you accommodation anywhere in the world, rather than one that specializes in one city. Thus, on the Airbnb platform, network effects are more resilient. In a sense, the “fractal” structure of the network effects in both these examples makes their economics more complex than those of traditional two-sided markets, potentially making them either stronger or weaker. As I discuss in chapter 6, there are a number of new regulatory challenges raised by the emergence of the sharing economy. One that I do not discuss relates to the question of market power. This is because deepening our understanding the nature of these new network effects, or asking the question framed by Professor Maurice Stucke when he spoke at a June 2015 Federal Trade Commission panel about regulating the sharing economy—“Do I have the analytical tools to assess what the impact would be?”

 

pages: 202 words: 66,742

The Payoff by Jeff Connaughton

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algorithmic trading, bank run, banking crisis, Bernie Madoff, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, desegregation, Flash crash, locking in a profit, London Interbank Offered Rate, London Whale, Long Term Capital Management, naked short selling, Plutocrats, plutocrats, Ponzi scheme, risk tolerance, short selling, Silicon Valley, too big to fail, two-sided market, young professional

In a speech on September 14, 2009, the anniversary of the collapse of Lehman Brothers, Ted warned of a flash crash and how HFT would fuel it: [U]nlike specialists and traditional market-makers that are regulated, some of these new high-frequency traders are unregulated, though they are acting in a market-maker capacity. They have no requirements to “maintain a fair and orderly” market. They trade when it benefits them. If we experience another shock to the financial system, will this new, and dominant, type of pseudo market maker act in the interest of the markets when we really need them? Will they step up and maintain a two-sided market, or will they simply shut off the machines and walk away? Even worse, will they seek even further profit and exacerbate the downside? One problem we faced—and one you may be experiencing as you read this chapter—is that HFT isn’t just mind-boggling. It’s mind-numbing. Senator Kay Hagan (D-NC), a fellow freshman who’d become Ted’s friend, was presiding in the chair on the day Ted gave the above speech.

Regulators’ lack of understanding of HFT strategies and the volatility they create left the markets vulnerable to a nausea-inducing plunge. For example, the SEC took for granted that high-frequency traders were the new market makers without taking into account the ways in which they differed from traditional market makers. Not only did the speed of HFT algorithms cripple the markets in a matter of minutes, but the absence of true market makers to guarantee two-sided markets in times of high volatility created an enormous liquidity shortage. Andrew Haldane, executive director for financial stability for the Bank of England, said that the flash crash demonstrates that HFT is “adding liquidity during a monsoon and absorbing it during a drought.” Although circuit breakers may make a crash less calamitous, they’re not a cure for regulatory ignorance. Third, the lack of data made identifying the causes of the flash crash a monumental task.

 

pages: 282 words: 80,907

Who Gets What — and Why: The New Economics of Matchmaking and Market Design by Alvin E. Roth

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Affordable Care Act / Obamacare, Airbnb, algorithmic trading, barriers to entry, Berlin Wall, bitcoin, Build a better mousetrap, centralized clearinghouse, computer age, crowdsourcing, deferred acceptance, desegregation, experimental economics, first-price auction, Flash crash, High speed trading, income inequality, Internet of things, invention of agriculture, invisible hand, Jean Tirole, law of one price, Lyft, market clearing, market design, medical residency, obamacare, proxy bid, road to serfdom, school choice, sealed-bid auction, second-price auction, second-price sealed-bid, Silicon Valley, spectrum auction, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, The Wealth of Nations by Adam Smith, two-sided market

MARKETS FOR BREAKFAST AND THROUGH THE DAY [>] sold “by sample”: See Jonathan Levin and Paul Milgrom, “Online Advertising: Heterogeneity and Conflation in Market Design,” American Economic Review 100, no. 2 (May 2010): 603–7. [>] Credit cards offered merchants: Credit cards are sometimes referred to by economists as “two-sided markets” because of the way they form a marketplace that needs to attract two different kinds of participants: merchants and consumers. One important strand of work focuses on how the two sides of the service should be priced; see, for example, Jean-Charles Rochet and Jean Tirole, “Two-Sided Markets: A Progress Report,” RAND Journal of Economics 37, no. 3 (Autumn 2006): 645–67. [>] they seldom switch cards: See Lawrence M. Ausubel, “The Failure of Competition in the Credit Card Market,” American Economic Review 81, no. 1 (March 1991): 50–81. [>] middlemen: For competition among middlemen, see Benjamin Edelman and Julian Wright, “Price Coherence and Adverse Intermediation” (working paper, Harvard Business School, Cambridge, MA, December 2013). 3.

 

pages: 209 words: 13,138

Empirical Market Microstructure: The Institutions, Economics and Econometrics of Securities Trading by Joel Hasbrouck

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barriers to entry, conceptual framework, correlation coefficient, discrete time, disintermediation, distributed generation, experimental economics, financial intermediation, index arbitrage, interest rate swap, inventory management, market clearing, market design, market friction, market microstructure, martingale, price discovery process, price discrimination, quantitative trading / quantitative finance, random walk, Richard Thaler, second-price auction, short selling, statistical model, stochastic process, stochastic volatility, transaction costs, two-sided market, ultimatum game

In lowactivity securities, though, the potential dealer’s costs of continuously monitoring bids and offers may be too large to recover from the relatively infrequent trades. In these instances, continuous liquidity requires that a dealer be designated as such (by the market authority) and provided with additional incentives. Perhaps the best-known designated dealer is the NYSE specialist. The specialist has many roles and responsibilities, but an important one is maintaining a two-sided market when there is nothing on the limit order book and no one else on the floor bidding or offering. Establishing the proper incentives for designated dealers, though, has proven to be difficult. The issues involve measuring the liquidity that the dealers provide, determining the beneficiaries of this liquidity, allocating the costs, and balancing the rights of dealers against the public TRADING MECHANISMS users of limit orders (who are usually the dealers’ direct competitors).

 

pages: 294 words: 82,438

Simple Rules: How to Thrive in a Complex World by Donald Sull, Kathleen M. Eisenhardt

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Affordable Care Act / Obamacare, Airbnb, asset allocation, Atul Gawande, barriers to entry, Basel III, Berlin Wall, carbon footprint, Checklist Manifesto, complexity theory, Craig Reynolds: boids flock, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, en.wikipedia.org, European colonialism, Exxon Valdez, facts on the ground, Fall of the Berlin Wall, haute cuisine, invention of the printing press, Isaac Newton, Kickstarter, late fees, Lean Startup, Louis Pasteur, Lyft, Moneyball by Michael Lewis explains big data, Nate Silver, Network effects, obamacare, Paul Graham, performance metric, price anchoring, RAND corporation, risk/return, Saturday Night Live, sharing economy, Silicon Valley, Startup school, statistical model, Steve Jobs, TaskRabbit, The Signal and the Noise by Nate Silver, transportation-network company, two-sided market, Wall-E, web application, Y Combinator, Zipcar

Instead, they ended up hosting a forty-five-year-old father from Utah, a thirty-five-year-old woman from Boston, and a thirty-year-old Indian man. Brian and Joe realized this market might be bigger than they first thought. They soon launched Air Mattress Bed & Breakfast, later Airbnb. Airbnb is among the most successful of the shared-economy companies. Unlike many traditional businesses, shared-economy companies have no single base of customers. Rather, these companies provide two-sided markets that connect sellers (or people with something to share) with buyers (who are willing to pay for the product or service)—like the transportation-network company Lyft, which connects passengers who need a ride to drivers who have a car, and TaskRabbit, an errand-outsourcing company that connects people who need something done with “taskers” who will do the job. For Airbnb, it’s connecting local residents with room to spare and travelers who need a place to stay.

 

pages: 297 words: 91,141

Market Sense and Nonsense by Jack D. Schwager

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asset allocation, Bernie Madoff, Brownian motion, collateralized debt obligation, commodity trading advisor, conceptual framework, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, fixed income, high net worth, implied volatility, index arbitrage, index fund, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market fundamentalism, merger arbitrage, pattern recognition, performance metric, pets.com, Ponzi scheme, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sharpe ratio, short selling, statistical arbitrage, statistical model, transaction costs, two-sided market, value at risk, yield curve

Investment Insights Although track records are an essential component in making investment decisions, their routine use and superficial interpretation can lead to erroneous, and even completely misleading, conclusions. The key question an investor needs to ask is whether the implications of the past track record are pertinent for the future. It some cases, they will not be. For example, the track record of an equity hedge manager that coincides with a bull market may not be at all indicative of how the manager could be expected to fare in a more two-sided market, let alone a bear market. In some cases, a good track record may reflect excessive risk taking in a benign environment rather than manager skill. In order to assess the relevance of a past track record, an investor needs to understand the source of the past gains and the risks taken to achieve them. 1 Of course, many credit-based managers did well during 2003–2007 without taking on excessive credit risk exposure.

 

pages: 371 words: 108,317

The Inevitable: Understanding the 12 Technological Forces That Will Shape Our Future by Kevin Kelly

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3D printing, A Declaration of the Independence of Cyberspace, AI winter, Airbnb, Albert Einstein, Amazon Web Services, augmented reality, bank run, barriers to entry, Baxter: Rethink Robotics, bitcoin, blockchain, book scanning, Brewster Kahle, Burning Man, cloud computing, computer age, connected car, crowdsourcing, dark matter, dematerialisation, Downton Abbey, Edward Snowden, Elon Musk, Filter Bubble, Freestyle chess, game design, Google Glasses, hive mind, Howard Rheingold, index card, indoor plumbing, industrial robot, Internet Archive, Internet of things, invention of movable type, invisible hand, Jaron Lanier, Jeff Bezos, job automation, Kevin Kelly, Kickstarter, linked data, Lyft, M-Pesa, Marshall McLuhan, means of production, megacity, Minecraft, multi-sided market, natural language processing, Netflix Prize, Network effects, new economy, Nicholas Carr, peer-to-peer lending, personalized medicine, placebo effect, planetary scale, postindustrial economy, recommendation engine, RFID, ride hailing / ride sharing, Rodney Brooks, self-driving car, sharing economy, Silicon Valley, slashdot, Snapchat, social graph, social web, software is eating the world, speech recognition, Stephen Hawking, Steven Levy, Ted Nelson, the scientific method, transport as a service, two-sided market, Uber for X, Watson beat the top human players on Jeopardy!, Whole Earth Review

ITunes was an entire ecosystem of apps constructed on the capabilities built into the phone, and it boomed. Since Apple kept adding ingenious new ways to interact with the phone, including new sensors such as a camera, GPS, and an accelerometer, thousands of novel species of innovations deepened the iPhone ecology. A third generation of platforms further expanded the power of the marketplaces. Unlike traditional two-sided markets—say, a farmers’ market that enables buyers and sellers—a platform ecosystem became a multisided market. A good example of this is Facebook. The firm created some rules and protocols that formed a marketplace where independent sellers (college students) produced their own profiles, which were matched up in a marketplace with their friends. The attention of the students was sold to advertisers.

 

pages: 320 words: 87,853

The Black Box Society: The Secret Algorithms That Control Money and Information by Frank Pasquale

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Affordable Care Act / Obamacare, algorithmic trading, Amazon Mechanical Turk, asset-backed security, Atul Gawande, bank run, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, bonus culture, Brian Krebs, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chelsea Manning, cloud computing, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, Debian, don't be evil, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, Filter Bubble, financial innovation, Flash crash, full employment, Goldman Sachs: Vampire Squid, Google Earth, Hernando de Soto, High speed trading, hiring and firing, housing crisis, informal economy, information retrieval, interest rate swap, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, Julian Assange, Kevin Kelly, knowledge worker, Kodak vs Instagram, kremlinology, late fees, London Interbank Offered Rate, London Whale, Mark Zuckerberg, mobile money, moral hazard, new economy, Nicholas Carr, offshore financial centre, PageRank, pattern recognition, precariat, profit maximization, profit motive, quantitative easing, race to the bottom, recommendation engine, regulatory arbitrage, risk-adjusted returns, search engine result page, shareholder value, Silicon Valley, Snapchat, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical arbitrage, statistical model, Steven Levy, the scientific method, too big to fail, transaction costs, two-sided market, universal basic income, Upton Sinclair, value at risk, WikiLeaks

173 I imagine there would be mass protest and a slew of lawsuits. The very possibility seems antique, the fever dream of a robber baron. But in the digital realm, monopolistic cable firms are angling to impose a similar arrangement: to make Internet access cheap if paired with their own content, and pricier if used to access others’ work. Similarly, firms like Google and Amazon are in prime position to make money off both sides of a two-sided market: monetizing our data and purchases, while promoting to us their own products and ser vices, or those of “partners” who let the larger platform share in their profits. That’s one reason we need to look back to the legal principles that animated Populists and Progressives in response to America’s first Gilded Age. The great Internet companies and the physical networks that enable them are not the first private enterprises to achieve near monopolistic power over a key ser vice, and to leverage that power into windfall profits and influence.174 It happened in the nineteenth century with railroads and telegraphs.175 Like today’s search and cable companies, those fi rms controlled essential junctions of an emerging economic order.