The economics of platforms : concepts and strategy

274 Pages·2021·3.492 MB·English

by  Paul Belleflamme, Martin Peitz

“Questionsaboutdigitalplatformsareparamountintoday’seconomy.BelleflammeandPeitz
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interestedinpolicyorfirmstrategy.Itisparticularlyvaluablebecauseunlikemanytextbooks
itfocusesonthecuttingedgeofeconomicsresearch.”
CatherineTucker,MassachusettsInstituteofTechnology
“PaulBelleflammeandMartinPeitzputtheirmanyyearsofresearchandpolicyworkinto
thiscomprehensivebookthatcoversthekeyeconomicandpolicyaspectsofplatforms,
whichhavebeenplayinganincreasinglyimportantroleinourlives.Theauthorssuccessfully
walkthetightropebetweenrigorandaccessibilityforabroaderaudience,makingitanideal
bookforthoseseekinganintroductiontoplatformeconomics.Keyaspectsofnetwork
effects,directandindirectexternalities,pricing,andplatformdesignstrategiesarecoveredin
depth,balancingtheoreticalconceptswithempiricalfactsandcasestudies.TheEconomicsof
Platforms:ConceptsandStrategywillsurelyprovideanexcellentresourceandreferencefor
policymakers,businesspractitioners,researchers,andstudentsofbothundergraduate-and
graduate-levelprograms.”
SteveTadelis,UniversityofCalifornia,Berkeley
“Acomprehensiveandrigorousexpositionoftheeconomicanalysisofplatforms.Thebook
coversinanaccessiblewayawiderangeoftopicssuchasdesign,informationmanagement,
pricing,orstart-up.Thepresentationisclear,includingmaterialattheforefrontofthe
economicliterature.Writtenbytwoleadingscholarsinthedomain,thebookcaterstoawide
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platforms.”
BrunoJullien,ToulouseSchoolofEconomics
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behindplatformsinanydepth.Thispath-breakingbookfillsthegap,coveringthekey
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JulianWright,NationalUniversityofSingapore

TheEconomicsofPlatforms
Digital platforms controlled by Alibaba, Alphabet, Amazon, Facebook, Netflix,
Tencent and Uber have transformed not only the ways we do business but also
the very nature of people’s everyday lives. It is of vital importance that we under-
stand the economic principles governing how these platforms operate. This book
explains the driving forces behind any platform business with a focus on network
effects. The authors use short case studies and real-world applications to explain
key concepts such as how platforms manage network effects and which price and
non-pricestrategiestheychoose.Thisself-containedtextisthefirsttoofferasystem-
atic and formalized account of what platforms are and how they operate, concisely
incorporatingpath-breakinginsightsineconomicsoverthelasttwentyyears.
PaulBelleflammeisProfessorofEconomicsatUCLouvain.
MartinPeitzisProfessorofEconomicsattheUniversityofMannheim.

The Economics of Platforms
Concepts and Strategy
PAUL BELLEFLAMME
UniversitécatholiquedeLouvain,Belgium
MARTIN PEITZ
UniversityofMannheim,Germany
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www.cambridge.org
Informationonthistitle:www.cambridge.org/9781108482578
DOI:10.1017/9781108696913
©PaulBelleflammeandMartinPeitz2021
Thispublicationisincopyright.Subjecttostatutoryexception
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Firstpublished2021
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AcataloguerecordforthispublicationisavailablefromtheBritishLibrary.
LibraryofCongressCataloging-in-PublicationData
Names:Belleflamme,Paul,author.|Peitz,Martin,author.
Title:Theeconomicsofplatforms:conceptsandstrategy/PaulBelleflamme,MartinPeitz.
Description:Cambridge,UK;NewYork:CambridgeUniversityPress,[2021]
|Includesbibliographicalreferences.
Identifiers:LCCN2021008512(print)|LCCN2021008513(ebook)|ISBN
9781108482578(hardback)|ISBN9781108696913(ebook)
Subjects:LCSH:Multi-sidedplatformbusinesses.|BISAC:BUSINESS&
ECONOMICS/Economics|BUSINESS&ECONOMICS/Microeconomics
Classification:LCCHD9999.M782B452021(print)|LCCHD9999.M782
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Contents
ListofFigures pagex
ListofTables xi
ListofCases xii
Preface xv
GettingStarted 1
1 Platforms:DefinitionsandTypology 10
1.1 Within-GroupNetworkEffects 11
1.1.1 DefinitionandSources 11
1.1.2 AttractionLoops 13
1.1.3 ImpactsonPlatformChoices 15
1.2 Cross-GroupNetworkEffects 17
1.2.1 AttractionSpiral 18
1.2.2 Attraction/RepulsionPendulum 22
1.2.3 AttractionSpillover 24
1.2.4 Within-orCross-GroupNetworkEffects? 25
1.3 PlatformDefinitionandTypology 28
1.3.1 ADefinitionofPlatforms 28
1.3.2 WhatIs(andWhatIsNot)aPlatform? 31
1.3.3 DifferentTypesofPlatforms 35
2 Ratings,Recommendations,andtheUseofBigData 41
2.1 RatingsandReviews 42
2.1.1 ASourceofNetworkEffects 43
2.1.2 ProductRatingandReviewSystems 44
2.1.3 SellerRatingSystems 47
2.1.4 TheInformativenessofRatingsandReviews 53
2.2 Recommendations 60
2.2.1 ProductRecommenderSystemsandPopularProducts 60
2.2.2 ProductRecommenderSystemsandtheLongTail 64
2.3 Self-ReinforcingEffectsofBigData 70
2.3.1 NetworkEffectsorNot? 71
2.3.2 Short-TermorLong-TermEffects? 72
2.3.3 CostofCollectingandAnalyzingData 74
viii Contents
3 AnEconomicPrimeronNetworkGoods 77
3.1 DemandforNetworkGoods 78
3.1.1 ASimpleModelwithaSingleGoodandTwoUsers 79
3.1.2 DemandforaNetworkGoodwithManyUsers 83
3.1.3 DynamicBehavior,UserExpectations,andEquilibrium
Stability 86
3.2 PricingofaNetworkGood 90
3.2.1 PricingtoTwoUsers 90
3.2.2 PricingtoaContinuumofUsers 92
3.2.3 PricinginthePresenceofanAlternativeNetworkGood 94
3.3 StrategiesforNetworkGoods 99
3.3.1 CompatibilityDecisions 100
3.3.2 DynamicPricingofNetworkGoods 104
3.3.3 First-orSecond-MoverAdvantageinStandardWars? 105
4 GrowingaPlatform 108
4.1 PlatformorNotPlatform? 109
4.1.1 TheBasicTrade-Off:Enablingvs.Controlling 110
4.1.2 OtherTrade-Offs 112
4.1.3 HowtoChoose? 113
4.2 TheChicken-and-EggProblem 113
4.2.1 ChickenorEgg:WhichShouldComeFirst? 114
4.2.2 Divide-and-ConquerStrategy 115
4.2.3 SeedingStrategies 121
4.2.4 InitialIn-HouseProduction 123
4.3 BuildingTrustamongUsers 124
4.3.1 AsymmetricInformationProblemsonPlatforms 125
4.3.2 StrategiestoAddressTrustIssuesonPlatforms 126
4.3.3 TrustandNetworkEffects 127
4.4 PlatformExpansion 130
4.4.1 In-HouseProduction:TheReturn 131
4.4.2 GrowinginAdjacentMarkets 134
5 PlatformPricing 140
5.1 PlatformPricing:TheBasics 141
5.1.1 Prices?WhatPrices? 141
5.1.2 AMotivatingNumericalExample 142
5.1.3 PricingDistortionsbyaMonopolyPlatform 145
5.2 TheGeneralPlatformPricingProblem 147
5.2.1 TransactionFeesonaTwo-SidedPlatform 148
5.2.2 MembershipFeesonaTwo-SidedPlatform 150
5.3 NetworkEffectsandPricingInstruments 157
5.3.1 ConstrainedTwo-SidedPricing 157
5.3.2 Within-andCross-GroupNetworkEffects 162
Contents ix
5.3.3 PriceDiscriminationbyaPlatform 165
5.3.4 TheFreemiumStrategy 173
5.4 PricingandtheFormationofUsers’Expectations 176
5.4.1 ObservabilityofPrices 177
5.4.2 CommittingtoParticipationLevels 179
5.4.3 SequentialPricingandParticipation 180
6 PlatformDesign 185
6.1 AnotherLookatPriceStrategiesandNetworkBenefits 187
6.1.1 ProductVarietyandPriceLevels 187
6.1.2 SellerCompetitionandDifferentiallyInformedBuyers 197
6.2 NonpriceStrategiesandNetworkEffects 203
6.2.1 DesigningRatingandRecommenderSystems 205
6.2.2 BehavioralBiasesandObfuscation 215
6.3 PlatformGovernanceRegardingSellers’SellingStrategies 218
6.3.1 Behavior-BasedPricing 220
6.3.2 Targeting 224
6.3.3 ShouldaPlatformAuthorizeSellerstoPriceDiscriminate? 228
TheRoadAhead 233
Bibliography 242
Index 253
Figures
1.1 Asimplestarnetwork page13
1.2 Attractionspiral 18
1.3 Attraction/repulsionpendulum 23
1.4 Attractionspillover 24
1.5 Mappingthenetworkeffectsonaplatform 28
1.6 Atypologyofplatformsbasedonvaluecreationandcapture 37
2.1 Recommendersystemsandnetworkeffects–anumericalexample 61
2.2 Datavaluechain 71
3.1 Demandwithtwousersandweaknetworkeffects 81
3.2 Demandwithtwousersandstrongnetworkeffects 82
3.3 Multipledemandlevelsfornetworkgoods 86
3.4 Stabilityandinstabilityoffulfilled-expectationequilibria 89
3.5 Insufficientprovisionofnetworkgoods 93
4.1 Multipleequilibriawhenlaunchingaplatform 117
4.2 Platformexpansionbybuildingonauserbase 137
5.1 Demandsforparticipationonatwo-sidedplatform 154
5.2 Impactsoffeechangesonparticipationonatwo-sidedplatform 155