Introduction to multisided platforms

Section 10.1 Introduction to multisided platforms

OpenTable is a website where diners can browse local restaurants and make reservations from their phone or computer. The website is easy to use, searchable by geographic location, type of food, or how expensive the restaurant is, and - importantly - diners can use the website for free! Often, diners can even earn bonus rewards for making multiple reservations using OpenTable. It makes the process of securing a restaurant reservation much simpler for the diner. But how can this business stay afloat if it charges its users a price of zero dollars (and in some cases, a price of negative dollars if rewards are earned) to participate?

We typically model a traditional firm as transforming inputs into an output, then selling that output to consumers. But OpenTable operates a bit differently. For starters, diners do not buy meals from OpenTable; rather, they use the site to allow them to more easily buy a meal from a restaurant! Similarly, restaurants who post open reservations are not looking to OpenTable to take up those reservations. They hope to use OpenTable to find potential diners to take them.

OpenTable is a multisided platform¹ ²: it is a platform which helps to facilitate transactions between different sides of the market for restaurant meals. Buyers (the diners) and sellers (the restaurants) can always seek each other out without OpenTable (a diner can call and make an individual restaurant reservation directly), but the platform makes the process easier for each party. Diners have the advantage of browsing many options, looking at menus, prices, and user reviews - all in one digital location. Restaurants know that by posting openings on OpenTable, the openings are likely to be seen by more potential diners. Because they seek to connect two or more separate parties in a market, multisided platforms are often called matchmakers.

Platforms have existed in the economy for quite sometime. Shopping malls and farmers’ markets (which provide a centralized location to connect shoppers and retailers), real estate agents (who seek to connect home buyers with home sellers), and credit cards (which provide a service to facilitate transactions between buyers and merchants) are all platforms. However, in the last 20 years, platforms have played an increasingly prominent role in the economy. In fact, the 5 largest global corporations - Amazon, Apple, Facebook, Google, and Microsoft - all use platforms as a primary component of their business model:

Amazon.com is an online marketplace which serves as a platform to connect sellers and buyers;
Facebook is a social media app and website which creates a platform for users to connect with one another; in a sense, most Facebook users are both producers of content (by posting things to be shared) and consumers of content (by reading others’ posts);
Google is a search engine which connects consumers of information with creators of online content;
Apple and Microsoft both implement operating systems on mobile (iOS, Windows Phone) and computer (OS X, Windows); these operating systems are platforms which connect app creators with app users.

The recent and rapid growth in online content, combined with more advanced search algorithms and faster internet speeds, has increased the value of platforms. With so much information out there, a consumer can benefit from a centralized location for searching for consumer goods (Amazon, craigslist), food services (OpenTable, Yelp), rides (Uber, Lyft), streaming music (Spotify, Apple Music), or online video content (YouTube, Netflix).

Since in their role as multisided platforms, these firms play a facilitating role in the market, their behavior is quite different from that of a traditional input-to-output firm. These differences in behavior imply that we will need a unique set of tools to understand how platforms operate. For example, commonly, there is a ’’seller’’ and a ’’buyer’’ of the transaction the matchmaker facilitates - think Amazon or Spotify. And almost always, the multisided platform will charge different prices to the different sides of the market. In a seeming paradox, there is often one side of the market which receives a subsidy to participate, paying a price below cost, or even paying no price at all! For Amazon, it is the buyer who is subsidized: Amazon sellers must pay to post an item for sale. For Spotify, it is the seller who is subsidized by receiving payments per listen, while buyers of the musical content are charged subscription fees.

In this chapter, we will construct the basic building blocks of a model of multisided platforms. In doing so, we will uncover the unique conditions under which a platform can survive and thrive, and how platforms’ behavior compares and contrasts with the behavior of a traditional input-to-output firm.

In Depth 10.1.1.

Platforms ... and more?

If you are observing carefully, many of the examples of platforms above also engage in some input-to-output business. Besides developing operating systems, for example, Apple also produces and sells physical phones, computers, and accessories. Amazon produces eReaders, hands-free voice-controlled speakers, and original TV programming. Netflix produces original content too. How does this behavior interact with their roles as platforms?

The focus of this chapter will be on firms’ platform behavior. However, when we have a few theoretical tools under our belt, we will return to this question, to see how Netflix original content and Apple devices can either substitute for or complement how the firms operate as platforms.

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