Competition of Banks as Two-Sided Markets

Banks are two-sided markets when they supply payment platforms and make users interacting. The main characteristic of two-sided market is network externality, network externality determine the value of two-sided markets which is determined by users´ number of both sides. A key question is the boundary or equilibrium of two-sided markets, if network externality works, the return of scale is increasing and the equilibrium is complete monopoly. The model in this paper indicate that if buyers and sellers intense attracted each other, the scale of this two-sided market will grow unlimited and the equilibrium is complete monopoly. If buyers and sellers mutual benefit each other not so intense, the scale of this two-sided market will convergence. The most important thing for platform competition is not only client quantity, but also reduce transaction costs and make both sides attract each other. For banks, improve user experience and supply more attractive financial goods and services is important for competition.