Search

Choosing how easy to make it for buyers to discover new sellers is a key design decision for platforms. On one hand, enabling more discoverability generates more transactions and can be more attractive for sellers because they anticipate being discovered by new buyers. On the other hand, discoverability can make sellers more reluctant to participate because they anticipate their existing buyers will discover and purchase from other sellers. We model this fundamental trade-off and study how a platform's optimal level of discoverability depends on various factors: the degree of substitutability between the sellers' products; the standalone value of the platform's tools; the size of the platform's installed base of buyers; the nature of the platform's fees, including its ability to charge differential fees depending on whether a transaction is with a seller's existing buyers or not; the number of sellers; and asymmetries between sellers' sizes. This paper was accepted by Joshua Gans, business strategy. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2023.02362. [ABSTRACT FROM AUTHOR]

The article "Transforming Products into Platforms: Unearthing New Avenues for Business Innovation" discusses the power and challenges of platform businesses, emphasizing the benefits of network effects and scalability. It explores methods for brands to add platform elements to their products, such as inviting third-party sellers or connecting customers. The article also highlights the importance of careful governance and clear rules when implementing platform strategies to ensure a positive customer experience. Additionally, it emphasizes the significance of leveraging platform opportunities in today's digital economy and offers insights on building and utilizing platforms effectively. [Extracted from the article]

A key issue for the design of online marketplaces is addressing leakage. Buyers may use the marketplace to discover a seller or to obtain certain conveniences, but the seller may then want to take transactions off the marketplace to avoid transaction fees. Assuming buyers are heterogenous in their switching cost or inconvenience cost of purchasing directly, we provide a model in which there is partial leakage in equilibrium. We use the model to analyze the trade-offs associated with different strategies the marketplace can use to attenuate the effects of leakage: investing in transaction benefits, limiting communication, charging referral fees, using price-parity clauses, introducing seller competition on the marketplace, and hiding sellers that try to induce too much leakage. This paper was accepted by Joshua Gans, business strategy. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2023.4757. [ABSTRACT FROM AUTHOR]

We model dynamic competition between firms which improve their products through learning from customer data, either by pooling different customers' data (across‐user learning) or by learning from repeated usage of the same customers (within‐user learning). We show how a firm's competitive advantage is affected by the shape of firms' learning functions, asymmetries between their learning functions, the extent of data accumulation, and customer beliefs. We also explore how public policies toward data sharing, user privacy, and killer data acquisitions affect competitive dynamics and efficiency. Finally, we show conditions under which a consumer coordination problem arises endogenously from data‐enabled learning. [ABSTRACT FROM AUTHOR]

The editorial in the NIM Marketing Intelligence Review discusses the significant impact of platform businesses like Amazon, Apple, Alibaba, and Uber on the global economy. These companies have achieved impressive profits and market capitalizations while employing fewer workers compared to traditional firms. While platforms offer convenience and opportunities, they also raise concerns about privacy, fairness, and societal influence. Scholars in the issue explore challenges and opportunities in regulating and maximizing the social value of platform businesses, emphasizing responsible practices and innovation in the evolving digital landscape. [Extracted from the article]

A growing number of digital platforms operate in a dual mode: running marketplaces for third‐party products, while selling their own products on those marketplaces. We build a model to explore the implications of this controversial practice. We analyze the tradeoffs that arise from a regulatory ban on the dual mode, showing how such a ban can harm consumer surplus and welfare even when the platform would otherwise engage in product imitation and self‐preferencing. In the empirically most relevant scenarios, policies that prevent platform imitation and self‐preferencing generate better outcomes than an outright ban on the dual mode. [ABSTRACT FROM AUTHOR]

We explore conditions under which a multiproduct firm can profitably turn itself into a platform by "hosting rivals," that is, by inviting rivals to sell products or services on top of its core product. Hosting eliminates the additional shopping costs to consumers of buying a specialist rival's competing version of the multiproduct firm's noncore product. On the one hand, this makes it easier for the rival to compete on the noncore product. On the other hand, hosting turns the rival from a pure competitor into a complementor: the value added by its product now helps raise consumer demand for the multiproduct firm's core product. As a result, hosting can be both unilaterally profitable for the multiproduct firm and jointly profitable for both firms. This paper was accepted by Joshua Gans, business strategy. [ABSTRACT FROM AUTHOR]

A key strategic decision for platforms is the extent to which they should facilitate the entry of untested new products and sellers alongside established products and sellers. Exploration by current buyers helps future buyers better value these products and sellers. This externality across buyers raises the possibility that there may be too little exploration from the platform's perspective. On the other hand, when sellers have market power and so price strategically, and platforms extract a share of seller revenue (i.e., charge commissions), the direction of any such bias is not obvious. We provide a theory that predicts when the platform will prefer more, less, or the same level of exploration as that induced by sellers in equilibrium. Our theory can explain why platforms will sometimes have no incentive to steer buyers one way or another, or may actually want to steer buyers toward established products and sellers. This paper was accepted by Joshua Gans, business strategy. [ABSTRACT FROM AUTHOR]

We provide a new theory of ad valorem contracts (i.e., contracts that vary with the value of the transaction), which can explain why such contracts are widely used between vertically related parties (e.g., in franchising and licensing). Ad valorem contracts allow upstream firms (principals) to preserve their own incentives to make ongoing investments in the channel and deal with pricing distortions caused by channel coordination problems, while at the same time adjusting their investment on the basis of demand shocks that are only observed by the downstream firms (agents). We show that the optimal ad valorem contract allows the principal to achieve the same profits as if it could observe the demand shocks and control price. This optimal contract makes use of revenue sharing (to balance investment incentives and make the principal's investment responsive to demand through price), upfront fixed fees (to extract the agents' expected profit), and an additional term that depends nonlinearly on either price or demand (to correct for remaining pricing distortions). Our results are robust to the introduction of competition between agents, production costs, and imperfect monitoring of the agents' prices. This paper was accepted by Eric Anderson, marketing. [ABSTRACT FROM AUTHOR]

We consider whether workers who provide their services through online platforms, such as Handy and Uber, should be classified as independent contractors or employees. Using a formal economic model, we show how being too strict or too liberal in classifying workers as independent contractors (relative to the actual degree of control workers have) can be detrimental, not just to firms and welfare, but sometimes to the workers themselves. We also use the model to explore the extent to which an intermediate classification of workers between employees and independent contractors may lead to better outcomes. The intermediate classification is meant to apply to firms that retain control of some actions while their workers control others, as is the case for many online platforms. [ABSTRACT FROM AUTHOR]

How does a firm decide whether to employ professionals and control how they deliver services to clients, or to operate as a platform enabling independent professionals to provide services directly to clients? Similarly, how does a manufacturer decide whether to allow sales agents to choose certain costly actions (e.g., kickbacks to clients) or to take control of these actions itself? We answer this question using a principal–agent framework in which both the principal and the agent must be incentivized to carry out investments (or effort) that increase the revenue they jointly create. Our theory explains when the principal should take control over a particular decision ("control") or should instead allow the agent to make the decision ("enable"). It does so both for the case when there are multiple such transferable decisions for a single agent, and for the case when there are many agents and one transferable decision for each. We also consider the possibility of cost asymmetries between the principal and the agent, spillovers across agents, and the misclassification of the principal as an employer even though agents are allocated the relevant control rights. Finally, we explain how the "control versus enable" choice and its associated trade-offs differ from the classic "make versus buy" choice. The online appendix is available at https://doi.org/10.1287/mnsc.2017.2956. This paper was accepted by Joshua Gans, business strategy. [ABSTRACT FROM AUTHOR]

Intermediaries can choose between functioning as a marketplace (in which suppliers sell their products directly to buyers) or as a reseller (by purchasing products from suppliers and selling them to buyers). We model this as a decision between whether control rights over a noncontractible decision variable (the choice of some marketing activity) are better held by suppliers (the marketplace mode) or by the intermediary (the reseller mode). Whether the marketplace or the reseller mode is preferred depends on whether independent suppliers or the intermediary have more important information relevant to the optimal tailoring of marketing activities for each specific product. We show that this trade-off is shifted toward the reseller mode when marketing activities create spillovers across products and when network effects lead to unfavorable expectations about supplier participation. If the reseller has a variable cost advantage (respectively, disadvantage) relative to the marketplace, then the trade-off is shifted toward the marketplace for long-tail (respectively, short-tail) products. We thus provide a theory of which products an intermediary should offer in each mode. We also provide some empirical evidence that supports our main results. [ABSTRACT FROM AUTHOR]

The strategic use of first-party content by two-sided platforms is driven by two key factors: the nature of buyer and seller expectations (favorable versus unfavorable) and the nature of the relationship between first-party content and third-party content (complements or substitutes). Platforms facing unfavorable expectations face an additional constraint: their prices and first-party content investment need to be such that low (zero) participation equilibria are eliminated. This additional constraint typically leads them to invest more (less) in first-party content relative to platforms facing favorable expectations when first- and third-party content are substitutes(complements). These results hold with both simultaneous and sequential entry of the two sides. With two competing platforms-incumbent facing favorable expectations and entrant facing unfavorable expectations-and multi-homing on one side of the market, the incumbent always invests (weakly) more in first-party content relative to the case in which it is a monopolist. [ABSTRACT FROM AUTHOR]

The patent market consists mainly of privately negotiated, bilateral transactions, either sales or cross-licenses, between large companies. There is no eBay, Amazon, New York Stock Exchange, or Kelley's Blue Book equivalent for patents, and when buyers and sellers do manage to find each other, they usually negotiate under enormous uncertainty: prices of similar patents vary widely from transaction to transaction and the terms of the transactions (including prices) are often secret and confidential. Inefficient and illiquid markets, such as the one for patents, generally create profit opportunities for intermediaries. We begin with an overview of the problems that arise in patent markets, and how traditional institutions like patent brokers, patent pools, and standard-setting organizations have sought to address them. During the last decade, a variety of novel patent intermediaries has emerged. We discuss how several online platforms have started services for buying and selling patents but have failed to gain meaningful traction. And new intermediaries that we call defensive patent aggregators and superaggregators have become quite influential and controversial in the technology industries they touch. The goal of this paper is to shed light on the role and efficiency tradeoffs of these new patent intermediaries. Finally, we offer a provisional assessment of how the new patent intermediary institutions affect economic welfare. [ABSTRACT FROM AUTHOR]

We model competition between content distributors (platforms) for content providers, and show that whether or not content is exclusive or 'multihomes' depends crucially on whether or not content providers maintain control over their own pricing to consumers: if content providers sell their content outright and relinquish control, they will tend to be exclusive; on the other hand, if content providers maintain control and only 'affiliate' with platforms, then multihoming is sustainable in equilibrium. We show that the outcome under affiliation depends on the tradeoff between platform rent extraction (which increases in exclusivity) and content rent extraction (which increases in multihoming), and demonstrate that the propensity for exclusivity can be increasing, decreasing, or even nonmonotonic in content quality. Finally, if a content provider internalizes the effect of its own price on platform demand, we prove that a platform that already has exclusive access to content may prefer to relinquish control over content pricing to the content provider in order to reduce price competition at the platform level. [ABSTRACT FROM AUTHOR]

We analyze the incentives to divert search for an information intermediary who enables buyers (consumers) to search affiliated sellers (stores). We identify two original motives for diverting search (i.e., inducing consumers to search more than they would like): (i) trading off higher total consumer traffic for higher revenues per consumer visit; and (ii) influencing stores' choices of strategic variables (e.g., pricing). We characterize the conditions under which there would be no role for search diversion as a strategic instrument for the intermediary, thereby showing that it occurs even when the contracting space is significantly enriched. We then discuss several applications related to online and brick-and-mortar intermediaries. [ABSTRACT FROM AUTHOR]

This paper provides a new modeling framework to analyze two-sided platforms connecting producers and consumers. In contrast to the existing literature, indirect network effects are determined endogenously, through consumers' taste for variety and producer competition. Three new aspects of platform pricing structures are derived. First, the optimal platform pricing structure shifts towards extracting more rents from producers relative to consumers when consumers have stronger demand for variety, since producers become less substitutable. With platform competition, consumer preferences for variety, producer market power, and producer economies of scale in multihoming also make platforms' price-cutting strategies on the consumer side effective. This second effect on equilibrium pricing structures goes in the opposite direction relative to the first one. Third, variable fees charged to producers can serve to trade off producer innovation incentives against the need to reduce a platform holdup problem. [ABSTRACT FROM AUTHOR]

This paper provides a first pass at comparing two polar strategies for market intermediation: "merchant" mode -- buying from sellers and reselling to buyers- and "two-sided platform" mode -- enabling affiliated sellers to sell directly to affiliated buyers. The merchant mode is more profitable when the chicken-and-egg problem for the two-sided platform is more severe and when the degree of complementarity among sellers' products is higher. The platform mode is preferred when seller investment incentives are important or when there is asymmetric information regarding seller product quality. We discuss these tradeoffs in the context of several prominent digital intermediaries. [ABSTRACT FROM AUTHOR]

Software platforms are a critical component of the computer systems underpinning leading-edge products ranging from third-generation mobile phones to video games. After describing some key economic features of computer systems and software platforms, the paper presents case studies of personal computers, video games, personal digital assistants, smart mobile phones, and digital content devices. It then compares several economic aspects of these businesses including their industry evolution, pricing structures, and degrees of integration. [ABSTRACT FROM AUTHOR]