Critical Mass for Two-sided Platforms and the Strength of the Externalities

Abstract

Whether a two-sided platform faces a critical-mass problem in its start-up phase depends on how difficult it is to get each of the sides on board when the other side is not yet there – the so-called chicken-and-egg problem. If there is no chicken-and-egg problem, there is no critical-mass problem either. But having both sides on board is not enough to get the platform off the ground. The mutual encouragement between the sides must be sufficiently strong to trigger a self-sustained growth and this depends on the strength of the externalities. In this paper, we propose a measure for the strength of the externalities and define critical mass for two-sided platforms in terms of that parameter. Our definition is different from that proposed by Evans and Schmalensee (2010), but more in line with the way critical mass is defined for one-sided networks. We establish necessary and sufficient conditions for the occurrence of critical mass.