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PLATFORMS,COMPETITION & PRICING
THE MARKET EFFICIENCY AT THEERA OF THE INTERNET
THOMAS BARTHELETTELECOM SCHOOL OFMANAGEMENT2008
 
 
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PLATFORMS, COMPETITION& PRICING
THE MARKET EFFICIENCY AT THE ERA OF THE INTERNET
 ABSTRACT
Platforms are playing an increasingly greater role in our everyday life and therefore in the whole economy. In a world changing due to economic globalization, fair trades and efficiency of the markets are rising concerns. In this paper I try to determine what are the risks andopportunities of the “platform phenomenon”. To do so, I answer to the question “What is aplatform”. I underline the fact that the main aspect of a platform is in its pricing strategy whichrelies on a two-sided price structure. On the basis of these characteristics, I show that there aresome risks of unfair competition which authorities will have to prevent by adapting its rules tothis new trend. That is a
sine qua non
condition to the success of the platforms (and
a fortiori 
theInternet) in providing the market with more efficiency.
INTRODUCTION
 What is the common point between Meetic, the PlayStation and Windows? They are allplatforms
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! This new kind of market places is increasing very fast, along the rise of the “era of theInternet”.This phenomenon is still quite new but it has a very huge potential. European expertsestimated in 2003 that this business could amount to €195 billion within four years. That is areason why we should analyse whether or not these new market places are helping the marketbeing more efficient.Before being able to answer this question, it is necessary to answer the following question:
what is a platform? 
 
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A platform is a system with well-defined access points and rules on which other parties can buildapplications or services (Iansiti and Levien 2004; Eisenmann et al. 2006).
 
 
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 WHAT IS A PLATFORM?
2
 
 A platform is a market place,
id est 
an online space where supply meets demand. There aremany types of market places but they are usually divided into two main types: B2B(Covisint) and B2C (Meetic).The number of these structures has considerably risen over the past five years. This trend is to belinked with the growth of the Internet, now seen as a new architect of free trade. Platforms rely on new technologies which are really easy to install. That is also an explanation of why it grows sofast.The age of the Internet is ruled by 
information
. This is the core value added by platforms.They play a role of 
infomediation
by integrating all the externalities of a market. Thanks to thisinformation, the actors of the platform save money on transaction cost and the market becomesmore efficient.Now that we have seen the basics of the role of a platform, we should consider the key success factors of such a business. As any business, the goal is to have customers. But in the caseof platforms, the pricing strategy plays a very decisive role.
PLATFORM PRICING
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Usually, the price is based on a précised estimation of the costs on which a margin is added.Moreover, the costs are usually paid by the one who generated them (e.g. by buying a coffee, yougenerate the costs of raw materials and therefore you pay for it). As for the margin, it is calculatedon the basis of competition and the sensibility of demand.But in the case of platforms, the calculus is quite different. More than the price itself, it is thestructure of pricing which is essential: consumers don’t pay all the same price.Beware: it is very different from the discriminating prices used in a cinema for example. Inthe case of platforms, customers of the one side receive an incentive to join the platform. The sideeffect of their subscription is that more customers of the second side come also. This is called a
network externality 
, and this is the basis of platform pricing.So the main challenge of a platform company is to generate these externalities. However itmight quickly turn out to be like the “chicken-and-egg” challenge: who was first? In other words:
who are the players most sensible to the presence of the other party? 
Here are some examples:
PRODUCT SUBSIDIZED SEGMENT PROFIT-MAKING SEGMENT
Videogames
consumers Software developers
Newspapers
readers advertisers
Credit card
Card holder merchant
Social gatherings
celebrities othersSource: (Rochet & Tirolle, 2001)The answer to this question is crucial. In France, for example, Moneo (a virtual wallet) was afailure partly because the “chicken-and-egg” challenge had not been correctly addressed.
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(Vogel, 2003)
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(Rochet & Tirolle, 2001)
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