Why Is the Card Free for You and Expensive for the Shop? Somebody Has to Be Subsidised
By the BrainSnail editorial team. How these articles are written and checked, and how to tell us when one is wrong.
A business that has to attract two different groups at once, each of which only turns up if the other does, cannot price either side on its own costs.
The problem the business faces
Some businesses do not sell a product to customers so much as bring two distinct groups together and take a fee for doing it. A payment card needs both cardholders and shops. A marketplace needs buyers and sellers. A console needs players and game developers. A newspaper needs readers and advertisers. Neither group has any reason to join unless the other is already there, which means the business has to solve two recruitment problems simultaneously and at the start has nothing to offer either group.
How pricing works out
The pricing follows from the dependency rather than from costs:
- •One side is charged heavily and the other little or nothing
- •The subsidised side is the one that is harder to attract
- •Or the side whose presence the other values most
- •Total price across both sides matters more than either alone
- •A side may be paid to participate, not merely charged nothing
- •Costs on each side bear almost no relation to the price charged
The chicken and egg opening
Getting started is the hardest part and the standard tactics are recognisable once named. A business may subsidise one side outright, giving away hardware below cost or paying creators directly. It may fake the presence of one side by seeding content itself. It may launch in a narrow niche where a small number of participants is enough to be useful, then expand, which is the approach that built several large marketplaces. It may piggyback on an existing base assembled for another purpose. What rarely works is launching both sides at full price and waiting, which is why so many attempts fail at this stage.
When one side is not enough
Not every business with two customer groups works this way and the distinction matters commercially. The defining test is whether the two sides care about each other directly, so that the value to one rises when the other grows. A supermarket buys from farmers and sells to shoppers, and shoppers do not value the number of farmers as such, so it is an ordinary business with suppliers. A dating application fails entirely if one side is thin, however good the product is. The test also explains why some platforms can charge both sides, namely those where each side is scarce and valuable to the other.
Why regulators find it difficult
The structure breaks several tools that competition authorities rely on. Charging one side below cost looks like predatory pricing and is usually just the normal operation of the model. Charging the other side far above cost looks like exploitation and may be what makes the free side possible. Assessing market power requires looking at both sides together, and a landmark case about payment cards in the United States Supreme Court in 2018 turned on exactly that point. The tendency towards a single dominant platform is also strong, because the value to each side rises with the size of the other, which makes competition fragile in a way that standard analysis understates.
The takeaway
A business joining two groups who each only turn up for the other cannot price either side on its own costs, so one is charged heavily and the other subsidised, chosen by which is harder to attract. Getting started requires seeding, niche launches or outright payment. Competition analysis breaks, because below-cost pricing on one side is normal operation rather than predation.