by Andrew White | August 18, 2017 | Comments Off on Digital Platforms Force Rethink in Competition Theory
Diane Coyle, author (see GDP: A Brief but Affectionate History) and professor of economics at the University of Manchester, penned a comment in today’s US print edition of the Financial Times. It is titled, “Digital Platforms force a rethink in the theory of competition“. Given my interest in digital platforms and economics, I had no choice and had to read and blog about it. It is a most interesting piece and well worth thinking about. I want to explore her point but take a wider angle.
Digital platforms, when considered at a business model level, offer what is called a multi-sided market (See How to Evaluate Multisided Platform Investments). The root of this model relies on major research by a French economist, Jean Tirole, who looked at how platforms can operate two-sided markets where both parties can benefit from the inefficiencies of the work. With modern technology and the ability to connect many to one and one to many and many to many, we can extend this dialog to a platform-level. To anyone who has worked on truly collaborative business processes like CPFR, this is self evident. These scalable platforms that support “multienterprise” processes are vastly different to just hosting ERP with a browser on it for partners to connect to.
This aspect of multi-sided platforms suggest that prices (for services) on the platform will be subsidized by the operation of the platform itself. Thus ‘prices’ on the platform do not compare to equivalent services outside the platform, since the costs are ‘hidden’ (more correctly, sunk) and the platform itself (or its owner) ends up creating a positive feedback loop: the more business they attract the greater the cost advantage against those outside the platform. Again, the advantages of scale is not new but the strength of the feedback is much greater with a platform (with the correctly designed mutlienterprise business processes).
What is interesting with this work is that the ‘time to success’ or more correctly, ‘time to monopolistic behavior’ is super quick, thanks to the digital nature of those platforms. Hence the alarming calls of the article. It’s not that digital or non-digital platforms are wrong; it’s just that they create different dynamics for which most public policy (Diane talks to competition theory and policies to ensure it) is ill-defined to cope with. But don’t forget, the very speed that leads to success means other platforms have the same advantage. The real question is how many different or differentiated platforms can there be?
This question will become critical quite soon, I think. We only have to think of organizations like Amazon (digital retail), Google (digital-twin finger-print), and Facebook (digital-twin social/preferences). Can anyone foresee a competitor destroying either of the core businesses? Not yet. But there are bigger public policy issues that affect the digital world and the underlying analog world that still, today, keeps the lights on.
The US economy is experiencing a period of acutely low levels of private sector start-ups per year. Creative destruction has been neutered by politicians in order to save us from the damage of ‘boom and bust’ experiences of the past. The result of such “stability” has led to a recent massive boom and a recent massive bust. Any systems engineer will predict the same result. Whether it was conscious or unintended consequences, the motivation and ease by which innovation can get started has been throttled.
- CNN: Where are all the Startups? US entrepreneurship near 40-year low
- Washington Post: The Decline of American Enterpreneurship – in five charts
- Kauffman Index (which is now, finally, showing a recover)
Winner Takes All
There is growing evidence that public policy has led to less competition as a by product perhaps of greater economic or business stability. Large firms are becoming larger. The concentration of firms across a wide range of industries has been increasing for years. Much of the political system is geared to the lobby movement which reinforces the power of larger firms who can afford to outspend (out lobby) smaller groups and firms. This part of our economy is now self-fulfilling and shows no sign of slowing down. This is leading, possibly, to other issues related to slowing of innovation and productivity.
- FT: A two-tier economy creates inequality
- Economist: Free Exchange: Uncompetitive markets have macroeconomic consequences
- WSJ: Disturbing New Facts About Winner-Take-All Capitalism in US
So the bottom line to all this is yes, digital platforms will lead to a reordering of hitherto fore defined and ordered analog markets. And yes, first-mover advantage may lead to rich rewards; perhaps proportionately more than previous iterations of market formation. But public policy remains at fault- fewer and fewer big-winners will sustain themselves and in so doing seek to keep the innovators at bay. So the race to digital platform supremacy is on. Whoever get’s their first seems destined to be ontop for a long time and write the new rules of the new normal.
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