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Network effects typically generate multiple equilibria in two-sided markets. To overcome the methodological challenge of selecting an appropriate equilibrium, this article shows that many two-sided market models are weighted potential games, and therefore, a refinement of Nash equilibrium justified by many theoretical and experimental studies, potential maximization, pins down an equilibrium. Under potential maximization, platforms often subsidize one side and charge the other, that is, divide and conquer. The primary determinant of which side to subsidize/monetize is cross-side network effects. This divide-and-conquer strategy implies that platforms are often designed to favor the money side much more than the subsidy side.

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This paper studies network market problems in which firm(s)/platform(s) sets quality in addition to price. A well-established result in the network economics literature is that a profit-maximizing firm concerns only how quality is valued by the marginal consumer but not by inframarginal consumers, aka the Spence effect/distortion. For markets with strong network effects under which multiple market-tipping equilibria exist, I show that the validity of the previous result depends on the choice of the equilibrium selection criterion. Precisely, I show that all criteria commonly used in this literature give rise to the Spence effect, whereas the well-justified risk dominance criterion in game theory and its generalizations do not. Novel quality strategies are derived based on the latter criteria. This paper was accepted by Joshua Gans, business strategy.

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