A Diffusion Model for Two-sided Service Systems

Abstract

A diffusion model is proposed for two-sided service systems. ‘Two-sided’ refers to the existence of an economic network effect between two different and interrelated groups, e.g., card holders and merchants in an electronic money service. The service benefit for a member of one side depends on the number and quality of the members on the other side. A mathematical model by J. H. Rohlfs explains the network (or bandwagon) effect of communications services. In Rohlfs' model, only the users' group exists and the model is one-sided. This paper extends Rohlfs' model to a two-sided model. We propose, first, a micro model that explains individual behavior in regard to service subscription of both sides and a computational method that drives the proposed model. Second, we develop macro models with two diffusion-rate variables by simplifying the micro model. As a case study, we apply the models to an electronic money service and discuss the simulation results and actual statistics.