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Digital platforms explained

This article discusses the basic economics of Digital platforms and their current trajectories.
Hand holding iPad on dark background. Luminescent tech icons float from the screen.
© RMIT 2022

Much of your business and social life is coordinated through digital platforms such as social media, messaging platforms and credit card systems. These Web2 platforms are a cornerstone of modern economies. As we will explore below, digital platforms are a type of multi-sided market.

Before we explore Web3 platforms we first need to understand some basic economics of these multi-sided markets.

What are digital platforms?

Digital platforms often bring together two or more distinct but interdependent groups of customers. That is, they are multi-sided markets. Indeed, we can think of multi-sided markets as reducing the costs of different groups coming together to trade:

Multi-sided platforms reduce transactions costs and thereby facilitate value-creating interactions between two or more different types of economic agents.

These platforms work differently than single-sided markets (e.g. a pizza shop) because they create value by enabling interactions between two or more distinct participant groups.

Prominent examples of multi-sided platforms include:

  • Credit cards (connecting merchants and customers)
  • Google’s search engine (users and advertisers)
  • Apple’s iOS (application developers and users)
  • Ticketmaster (venues and customers).

The way that multi-sided platforms reduce costs is clear in the ‘sharing economy’ or ‘gig economy’. Platforms such as Uber (matching drivers and riders), Airbnb (matching house owners with renters) and Airtasker (matching tasks with skills) have benefited enormously from the mechanics of multisided platforms. They enable two distinct groups (sides of the market) to engage and trade which is mediated by the digital platform.

But how do digital platforms do this? They lower the cost of coordination. In many different ways these platforms coordinate trusted information that helps parties to match, negotiate and enforce contracts. For instance, reputation mechanisms or private certification systems can help to ensure trusted information about different sides of the market. Ratings are a particularly popular mechanism to enable bottom-up information to be made public.

Some key decisions in developing a multi-sided digital platforms include:

  • Onboarding sides of your market (which side of the market is harder to onboard?)
  • Number of sides of your market (are there more than two sides of your market?)
  • How is your platform governed (who makes decisions?)
  • The structure of pricing (who pays?)

We’ll explore some of these challenges throughout the rest of this week, including the ways that Web3 changes them (for better or worse).

For now, it’s important to understand the trajectory and challenges of Web2 digital platforms.

The trajectory of digital platforms

A multi-sided platform grows in value by attracting more users. Their growth and dominance are dependent on a phenomenon known as network effects, which we will explore in more detail in an upcoming step. Because of this, digital platforms can become very large very quickly, dominating market segments.

The dynamics of digital platforms — including their rapid and exponential growth — has led to some common criticisms and concerns. For instance, the platform owners can act opportunistically on the sides of the market. They might quickly change pricing structures, algorithms and standards, and censor particular actions or parties.

Related to this, much of the data of digital platforms are also siloed within the controlling organisation (including the identity of participants). This siloed data not only can make the data vulnerable, but it prevents competition between different digital platforms. The ultimate effect of this lack of competition can be stifling to innovation.

Many of these problems stem from the governance of digital platforms. That is, Web2 digital platforms are governed by a centralised entity. The centralised entity has power over the platform including its pricing, entry requirements and product development.

© RMIT 2022
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