THOMAS

BARTHELET

PL AT F OR M S , COM PE T I T ION & PR IC I NG
THE M ARKET EFFICIENC Y AT THE ERA OF THE INTERNET

TELECOM SCHOOL MANAGEMENT 2008

OF

P L AT F O R M S , C O M P E T I T I O N & PRICING
THE M ARKET EFFICIENC Y AT TH E ERA OF THE INTERNET

A B S T R AC T

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 and opportunities of the “platform phenomenon”. To do so, I answer to the question “What is a platform”. I underline the fact that the main aspect of a platform is in its pricing strategy which relies on a two-sided price structure. On the basis of these characteristics, I show that there are some risks of unfair competition which authorities will have to prevent by adapting its rules to this new trend. That is a sine qua non condition to the success of the platforms (and a fortiori the Internet) in providing the market with more efficiency.

I N T RO D U C T I O N

What is the common point between Meetic, the PlayStation and Windows? They are all platforms1 ! This new kind of market places is increasing very fast, along the rise of the “era of the Internet”. This phenomenon is still quite new but it has a very huge potential. European experts estimated in 2003 that this business could amount to €195 billion within four years. That is a reason why we should analyse whether or not these new market places are helping the market being more efficient. Before being able to answer this question, it is necessary to answer the following question: what is a platform?

A platform is a system with well-defined access points and rules on which other parties can build applications or services (Iansiti and Levien 2004; Eisenmann et al. 2006).
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W H AT I S A P L AT F O R M ? 2

A platform is a market place, id est an online space where supply meets demand. There are many 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 be linked 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 so fast. 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 this information, the actors of the platform save money on transaction cost and the market becomes more 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 case of platforms, the pricing strategy plays a very decisive role.

P L AT F O R M P R I C I N G 3

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, you generate the costs of raw materials and therefore you pay for it). As for the margin, it is calculated on 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 the structure 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. In the case of platforms, customers of the one side receive an incentive to join the platform. The side effect 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 it might 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

consumers Software developers readers advertisers Card holder merchant Credit card celebrities others Social gatherings Source: (Rochet & Tirolle, 2001) The answer to this question is crucial. In France, for example, Moneo (a virtual wallet) was a failure partly because the “chicken-and-egg” challenge had not been correctly addressed.
Videogames Newspapers
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(Vogel, 2003) (Rochet & Tirolle, 2001)

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We have seen that that the pricing in platforms is very different from standard businesses. That is the reason why free trade protection in this domain is also quite unique.

P L AT F O R M CO M PE T I T I O N 4

The fact that the phenomenon is still quite new makes it difficult to wisely evaluate the impact it has on the economy. Many changes will occur. The first move will be a concentration of these structures. Because they need to reach a critical size to survive, a massive wave of concentration will occur. Experts evaluate that about nineteen platforms out of twenty will disappear so that only two or three structures will remain in each sector. Another consequence of the early age of this trend is the relative lack of legislation ruling this new business. The US Federal Trade Commission (FTC), the French Direction Générale de la Concurrence, de la Consommation et de la Répression des Fraudes (DGCCRF), the English Office of Fair Trading (OFT), the German Bundeskartellamt and the European Commission, have all examined Covisint which fell under several types of free trade laws, even within a single country. This case means two things. Firstly the law is not suited to this new kind of business yet. And secondly, there is a lack of global harmonisation between countries. This is especially crucial when it comes to businesses which essentially reach a global scale. Let’s see in details how the previously mentioned governmental organisations would proceed. The first question to ask is whether or not the platform is autonomous from the companies which created it. If it is the case, it is a concentrative platform. It might tend to be monopolistic. It might also just be a coordination of the actors. In that case, if their market share is over 15%, there is a risk of information sharing. This lack of privacy would be unfair. If the structure is not autonomous from its founders, then it is unclear what could happen. Each case is analyzed individually. The second question is about free entrance. It is a sine qua non condition. However, the challenge is to evaluate if the platform is trying to squeeze its competitors. Indeed, as we have seen, the pricing strategy is unusual. If one measures the price applied for the subsidized fragment in the case of one platform, it might not be comparable with another platform with a different strategy. The challenge is to include externalities in the evaluation of the market.

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(Vogel, 2003)

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CO N C LU S I O N

Platforms seem promising in terms of market efficiency. They are easy to create while providing its customers with great value. One of its greatest advantages is the creation of network externalities based on a wise pricing structure. However, it has now become a real challenge for regulatory boards which have now to adapt to these new structures. Three main aspects will have to be controlled: autonomy, free entrance and privacy. The stakes are huge. Indeed it appears that “revenues on eBay are consistently 20 to 70 percent higher than those on Yahoo!” (Brown & Morgan, 2006). A market place ending tipping is far from efficiency!

REFERENCES

Brown, J., & Morgan, J. (2006). How Much is a Dollar Worth? Tipping versus EquilibriumExistence on Competing Online Auction Sites. Rochet, J.-C., & Tirolle, J. (2001). Platform Competition in Two-Sided Markets. Vogel, L. (2003, September 10). Ateliers de la concurrence: Internet. Consulté le March 16, 2008, sur Direction générale de la concurrence: http://www.finances.gouv.fr/fonds_documentaire/dgccrf/02_actualite/ateliers_concu/internet3.ht m

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