What is a two-sided market?

Last Updated: 5 Dec 2023

A two-sided market is defined as a situation where both buyers and sellers meet and mutually agree to exchange a product or a service. A two-sided market aims to create value by enabling direct interactions between two parties, both of them customers of the two-sided platform. The two-sided market is also called a ‘two-way market’ or a ‘two-sided network.’

Every transaction, big or small, takes place between two parties: the one who is selling and the one who is buying. Every economy depends on these parties to carry out these transactions and fuse value in the ecosystem. The buyers are ready to spend on the products or services needed to add value to their lives, and the sellers are ready to let go of the products or the services for money. On a larger scale, countries earn taxes and added income on these transactions between buyers and sellers.

However, it is almost impossible for buyers to directly buy everything they need from the sellers or for the sellers to find direct buyers for their products or services. This is where intermediaries help. These intermediaries create a platform that allows the buyers and the sellers to interact with each other, benefitting from the mutual service as they find customers in both buyers and sellers.

New and efficient platforms are being created daily to facilitate these transactions and avoid time-consuming processes for buyers and sellers. This concept of buyers and sellers mutually agreeing to transact through a common platform is known as a two-sided market.

How does a Two-Sided Market work?

A two-sided market has three participants: the intermediary, the buyers, and the sellers. Every transaction proceeds with the inclusion of these three parties and how they interact with each other.

• Intermediary: The intermediary creates a platform or a service to match the buyers and the sellers with each other. Both the parties become the intermediary’s customers, and the aim is to accelerate, facilitate and fuse efficiency in the mutual transactions.
• Buyers: This is the party that is ready to buy a product or a service and spend money for the same. However, the buyers know what product or service they want and only wish to spend if they find the desired product or service.
• Sellers: The seller is the creator of a product or service. The main aim of sellers is to find buyers who are looking for the created product or service and are willing to pay the sellers for the same.

A two-sided market improves the economic ecosystem by accelerating and simplifying transactions and decreasing the cost of finding concerned parties. A two-sided market with network effects derives its value from the number of customers on either side (buyers or sellers). The higher the number of customers, the larger the intermediary platform can scale. It is because of the increased goodwill, traction, and volume of transactions a platform will see and, as a result, can charge both the buyers and the sellers.

Features of a two-sided market

Here are the distinct features of a two-sided market:

• Intermediary: The two-sided market is unique to the intermediaries that it has who act to manage the demand and supply equilibrium by matching buyers with sellers. They charge a small fee from both parties to use the platform and its features.
• On-boarding: This is an essential feature. There is a need for the on-boarding of both the buyers and the sellers. The two-sided market seizes to work if it can’t find customers on both sides ready to use the intermediary platform to buy or sell products.
• Accelerate Buying/Selling: A two-sided market works on the principle of accelerating the buying and selling process. It invests in developing new and efficient features, processes, chains, etc., in providing a time-efficient and straightforward way to do business.
• Different Functionality: Users on each side of the two-sided market expect different functionality from the common platform. For example, a B2C platform may require a different set of functions within the platform than a B2B platform that only caters to other businesses.
• Different Preferences: Parties in a two-way market exhibit different preferences for the number of participants in the other group. For example, buyers may want as many sellers as possible on the platform to get a wide choice of products. However, the sellers may want a smaller number of sellers to avoid high competition.

Implications and securities trading on the two-sided marketplace?

One of the most widely used implications of the two-sided market is the Indian stock market and its intermediaries. As mentioned above, wherever two parties come together to transact, it is a double-sided market. The same goes with the stock market, where you can’t sell a stock if no buyer is wanting to buy it for the price you are selling. Similarly, the same goes for a buyer wanting to buy a stock.

In this scenario, the stock market has intermediaries called stockbrokers who manage the two parties in the two-way market and provide them with a platform where they can buy and sell stocks in seconds. One such broker is IIFL, which provides unique features such as Trader Terminal, TT Web, etc., to ensure that the two parties can trade in stocks and other financial securities with utmost transparency along with less hassle. For securities trading on the two-sided market facilitated by IIFL, you just have to open a Demat and trading account.

IIFL provides the facility to open a free Demat and trading account by following easy and simple steps. You just have to visit the IIFL’s website or download the IIFL demat account app to open the two accounts and benefit from the unique double-sided market created by IIFL. For opening the accounts, follow the below steps:

1. Visit www.indiainfoline.com or the IIFL markets mobile app. Click on open a trading account» Enter Basic details.
2. You will receive a one-time password (OTP) on the mobile number.
3. You will receive a link on your registered email id. You need to enter the OTP received on your registered email id.
4. After verifying the OTP, you need to fill out the online Account Opening Form.
5. Your Relationship Manager will then contact you for the necessary documentation.
6. Once the documentation process is completed, and the forms are received at HO, the account will be opened within 24 hours.

Conclusion

The two-sided market has become a fundamental necessity for buyers and sellers presently. In the past, it was a hassle to find direct buyers or sellers to add value to the ecosystem as geographical and technical factors limited it. With the advent of two-sided markets, business transactions are witnessing unprecedented volumes as buyers and sellers are being matched with each other instantly. For the stock market, investors had to physically visit the stock exchanges to buy and sell shares, where finding the right buyer or seller was difficult. Now because of the two-sided market and its intermediaries like IIFL, investors can complete transactions in just a few clicks.

Frequently Asked Questions

What is a two-sided market?

You can create a two-sided market by following these steps:

• Pick an operating industry based on your expertise.
• Build a community by interacting with buyers and sellers and on-board them on the platform.
• Try to solve a general market platform through your platform.
• Take feedback from both parties to improve the platform in the future.
• Charge a reasonable fee based on market standards.

What are the ways of a two-sided market?

The ways of a two-sided market are Cross-side network effects and same-side network effects.