- 21 Jun 2007
- Working Paper
Multi-Sided Platforms: From Microfoundations to Design and Expansion Strategies
Executive Summary — The term "platform" is increasingly popular among executives today. Platforms, and multi-sided platforms (MSPs) in particular, serve the needs of interdependent constituents. Although MSPs have existed for centuries in the form of matchmakers and village markets, information technology has increased tremendously the opportunities for building larger, more powerful, and more valuable platforms. At the same time, by expanding the potential scope of platforms, information technology has also increased the number and complexity of factors, both economic and technical, that drive the strategic design of MSPs. Surprisingly, few companies rigorously analyze the underlying drivers of their MSPs, and the emerging business and economics literature on two-sided markets has not been very helpful in this direction, either. This article provides a general framework to help organize managerial thinking about MSPs. Key concepts include:
- This framework is useful because it induces systematic analysis of MSP strategic opportunities and the critical tradeoffs involved, based on fundamental economic functions that cut across any specific industry setting.
- Strategic design defines the relevant space in which the MSP operates, its multiple constituents, and its competitors, both actual and potential.
- Designing and expanding MSPs is a complex, daunting, and, most importantly, dynamic process. The most successful MSPs are constantly evolving.
- While this dynamism is especially true in high-tech markets, even traditional businesses can unlock powerful sources of indirect network effects with a little technological help and a good amount of creativity. The devil is in the details.
Multi-sided platforms (MSPs), which bring together two or more interdependent groups of customers, have recently risen to economic and business prominence in many industries. This paper first lays out a simple micro-founded framework which aims to organize academic and managerial thinking about MSPs. It argues that any MSP performs one or both among two fundamental functions: reducing search costs and reducing shared transaction costs among its multiple sides. Using a variety of illustrations, the framework is then used to formulate general principles driving MSP design and expansion strategies: choosing the relevant platform "sides", deciding which fundamental activities to perform and trading off depth against scope of MSP functions. Keywords: Multi-Sided Markets, Multi-Sided Platforms, Microfoundations. 26 pages.