Matchmakers: The New Economics of Multisided Platforms

"This is related, because these multi-sided platforms and how we understand them rely very much on market design mechanisms and the work of Jean Tirole. By platforms we mean things like Uber and AirBnB. But there are lots of other examples emerging as well. It’s becoming a very popular business model to try. The one thing that was needed was almost always internet access, so smartphones were very important. The other thing is the matching algorithms, because rather than being a traditional business—where you have suppliers at one end, you buy the components and do something to them and then sell them to the customers at the other end—they act like an exchange, matching the suppliers on the one hand and the customers on the other. They capture what are called ‘network externalities,’ where, if you are a supplier, the more customers there are, the happier you are, and if you are a customer, the more variety there is to choose from, the happier you are. “Obviously there are all kinds of issues raised by these platforms, but there’s a sort of hysteria on both sides about them which is, I think, unhelpful.” So if you can bring those together, you create a lot of value. You create value for the suppliers because they’ve got more demand to meet and you create value for the customers because they’ve got much better choice and much better prices, there’s more competition. And you create a profit for the platform as well. So they’re incredible value creation machines when they work well. But they’re very hard to get off the ground, because you’ve got to keep your supply and demand in balance. That’s quite tricky. You don’t want to sign up too many people on one side, if you don’t have enough people to buy from them and vice versa. So they all have this really difficult period, where it doesn’t look like very much is happening. Then, they get to a critical point and they can grow extremely quickly. Then, of course, they become really high profile and unpopular. It’s really obvious that they’re fantastic for consumers and the fact they have millions of consumers speaks to that. All the concerns about ‘Is this really a good deal for the suppliers on the other side?’ — you have to think about the counterfactual. What would be happening to those suppliers otherwise? People don’t have to drive for Uber, so how good the deal is for them depends on what outside options they have. In the UK, most Uber drivers switched from other minicab companies. They’ve got a minicab license and they could switch back. So, as long as they’re willing to drive, it seems to me they’re getting value out of it. Obviously there are all kinds of issues raised by these platforms, but there’s a sort of hysteria on both sides about them which is, I think, unhelpful. But there are more and more of them. It’s a very successful business model when it works. There are real challenges for non-US companies because when you’re going through that period—before which you can tell whether you’re going to be successful—you eat money. And only the US has had finance of scale to turn these into very large businesses. If you can get to be big enough, you can become global, because there are huge economies of scale in this. So there’s a challenge for companies in any other country in getting to the scale in which they can compete with the American titans. I think it’s the finance — because you can enter other markets globally. The only successful competitors have been in China, so the scale of the home market is obviously important, but they’ve also had some deep pockets behind them. In the UK, Deliveroo has been the most successful in terms of raising finance and profile. They raised something like GBP150 million, whereas Uber has raised billions of dollars. So Matchmakers is a nice business-economics book. It describes how the business model works, it gives lots of examples, it talks about the challenges in terms of regulation and competition. If you want to start to understand the issues raised by these kinds of businesses, it’s a really good, clear place to start. It’s all new, and that’s what Jean Tirole’s work was all about. If you use your basic Econ 101 intuition, you’ll misunderstand what’s happening in the market. For example, most often, these companies have asymmetric pricing: so the suppliers will pay the platform and the consumers will get it free. That looks like you might be doing predatory pricing, or the kind of cross-subsidy that would make competition regulators really worry in conventional markets. But it might well be that the platform, as a whole, is very competitive and it’s just got this asymmetric pricing structure. So how you think about market definition and the signs of competition or lack of competition is different."