Does a Business Platform imply a two sided market?

by Haydn Shaughnessy on June 23, 2014

One Pound CoinDigging deeper into how platforms are conceived, used and then managed, it is worth asking do they always imply a two-sided market? The idea of the two-sided market stems from work by Parker & Van Alstyne (2000;2000; 2005)  and Rochet & Tirole (2003). Those markets are generally understood as a refinement of network effects. A network effect happens for example when a company like Facebook has a given number of members each of whom will benefit if the platform has more members, i.e. more friends. That incentivises those users to bring in other users.

In the case of many software markets, recruiting new users is given over to existing users (e.g. DropBox and its double incentive marketing). This is valuable when the addition of users makes everyone’s experience better (e.g. Skype). It needs to be incentivised when the network effect is low (DropBox). Network effects have a profound effect on how business models are designed.

But are all platforms bound by network effects or by two-wides markets? Some clearly are:

AirBnB users benefit when there are more apartments; Uber users benefit when there are more taxis. These types of services have grown as match-pairing technology improved.

This is substantially different, however, from Skype where each user needs another user, not another Skype or service provider. This is a more classic network effect. Every user is motivated to bring in other users to make the service more valuable.

On the other hand, Quirky users do not need other Quirky users to make their products happen. They need the services the platform provides.  GrabCad members do need other members but not in a truly imperative sense. Having access to other members lies in the category of “very nice to have” rather than “must-have”. The counter parties truly add value without causing dependency.

Here are Parker & Van Alstyne’s examples of two-sided markets:

credit cards, composed of cardholders and merchants; HMOs (patients and doctors); operating systems (end-users and developers), travel reservation services (travelers and airlines); yellow pages (advertisers and consumers); video game consoles (gamers and game developers); and communication networks, such as the Internet.”

Another characteristic of platforms is way that they enable economic activity. In these instances the platform is only enabling a consumption transaction or service.For example in credit cars, that is abundantly obvious. The platform exists to enable transactions. But also in gaming the fundamental objective is to consume the game.

In many instances of platform though, the platform is enabling productive activity. In the case of GrabCad, the objective is to share design drawings in order to reduce the time of development of new products. In open source platforms a similar productive activity is taking place.

In these cases too the platform has a network effect but is not bound by a two-sided market. It is bound instead by a moral framework.

Platforms have many characteristics that make it difficult to nail down one definition. Here are some examples.

The last column “exchange” refers to the degree to which exchange is a focal point of the platform. Exchange can be a high r low focus or it can be direct or indirect.

“Multiparty” is a new development in platform environments, beyond two-sided markets. For example Apple’s struggle with Health Kit is going to be making it work for multiple-sided markets including hospitals, family doctors, labs, devices, monitoring services, analytics and users. In that sense the market itself becomes ecosystem-like and poses new degrees of complexity on marketing and coordination.

PLATFORM Network effect Two-sided market Multi-sided market Exchange
Quirky Low No No Medium
AirBnB Medium Yes No High
GrabCad High No No Indirect
App Store High Yes No High
Health Kit High No Yes MultiParty
Credit cards High Yes No High
Billing Medium No Yes Multiparty

I’ll come back with some more thoughts in the next few weeks. Here is a definition provided by Gawer, taken from Parker & Van Alstyne:

Industry platforms are products, services or technologies that are developed by one or several firms, and which serve as foundations upon which other firms can build complementary products, services or technologies.”

I don’t find this enlightening but I do think it illustrates the difficult of finding a good definition.

About Haydn Shaughnessy :

Haydn Shaughnessy is a Senior Advisor with Bearing. He speaks and advise on innovation and transformation, having studied the topics since the early 1980s. He advises companies and organizations on the latest thinking and practice in these areas and in particular about the elastic enterprise, the strategies that have propelled companies like Apple and Google to global leadership in their fields.

Haydn is a research fellow at The Paul Merage School of Business's new Center For Digital Transformation, a fellow at the Society for New Communications Research, a Senior Adviser at Bearing Consulting, and a Forbes contributor.

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