Critical Mass and Mature Equilibria for Two-Sided Platforms, and the Strength of the Externalities Between the Sides

Abstract

Abstract Critical mass is central to the development of two-sided platforms. It is the level of participation on both sides that is required to have the platform grow on its own force to a mature equilibrium. Despite this commonly understood dynamic, a formal definition of critical mass is missing in the literature on two-sided platforms, except for a proposal by Evans and Schmalensee (2010. “Failure to Launch: Critical Mass in Platform Businesses.” Review of Network Economics 9 (4)) who defined critical mass not as a single combination of platform sizes, but as a frontier in the two-dimensional space of those levels. We set out a demand model for two-sided platforms, propose a measure for the strength of the externalities between the sides and define critical mass in terms of this externality parameter. Our definition is more in line with the way critical mass is defined for one-sided networks. We also set out the conditions that must be met for the occurrence of critical mass.