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AbstractWhenever agents to a transaction (for example, consumers and suppliers) interact through intermediaries or a 'platform' that is controlled by a third party, the agents are using a two‐sided platform. Two‐sided platforms are common. However, if a two‐sided platform involves network effects, so that participants on one side of the platform care about the number of participants on the other side of the platform, it is a two‐sided market. These markets raise a variety of important issues for economists and policy‐makers. In this article, I briefly explain the nature of two‐sided markets and, using simple examples, show how they can behave very differently to standard one‐sided markets.

Two-sided platform firms serve distinct customer groups that are connected through interdependent demand, and include major businesses such as the media industry, banking, and the software industry. A well known textbook result in one-sided markets is that a government may increase a monopolist's output and reduce the deadweight loss by subsidizing output. The present paper shows that this result need not hold in a two-sided market. On the contrary, a higher ad-valorem tax rate - rather than a subsidy - could increase output and enhance welfare.