Dynamics of two-sided internet markets

This paper presents a dynamic view of a two-sided market combined with Dixit's approach of entry deterrence used in industrial economics. Resolving backwards the development to reach the point of entry deterrence in time the model splits the business strategy of the first entrant in a social network market into three phases: Market Entry, Automatic Growth Path, Exploiting Monopolistic Rents. A result is that the company has to solve the trade-off between the height of registration fees and marketing efforts in time. The real world story, that registration fees are omitted by social network provider in the Internet and the companies nevertheless invest in marketing and technology, so that they have to take losses during the first years, can be explained. In contrast to standard assumptions about the strategy of Schumpeterian pioneers, in social networks the market leader does not exploit monopolistic profits at the beginning. © 2010 Springer-Verlag.