Looking through the content of collaborative commons like blog entries, Wikipedia entries, YouTube films, or headline news offered by different news services that we use at home for free, if we do not like something, we just can jump to another page. We only lose a little bit of our time, and by the way, we also learn something. No harm is done to anybody.
In the case of an access platform like a smart grid in power supply, we are just connected to it. All processes are carried out automatically with the same quality for every user or every prosumer. It is only algorithms about a service that is highly technical and standardized.
But if we engage in exchanges peer to peer remotely and virtually, just access is not enough. If we buy things online, we cannot check their quality as in an analog shop; we cannot touch it, we cannot smell, we cannot taste. We have to rely on what we see on our computer or smartphone screens. We cannot use cash or simply take out one of our cards or a smartphone application and touch the payment modem as we pay. Looking through several Internet pages would also be a loss of time if we look for only a specific thing.
It lasted a decent couple of years till the digital platforms as we know them today as Uber or Airbnb got to the solutions they offer today. It also took some time for someone to come up with and believe me or not, but the very visionary was Elon Musk himself, to develop payment systems used by Internet platforms as we know them today.
So, let us sum up here the functional role played by digital platforms that enable peer to peer exchanges. First, it is an exchange place, a place where potential suppliers and potential customers may meet and match. It was the natural part of that process. It was just copying the analog marketplaces into the virtual world at a much larger scale. That what the providers got from it at the economic level were the so-called lateral economies of scale. The platform’s turnover might be so huge that only relatively small transactional fees make huge revenues. Look at the most prominent companies and the wealthiest people in the world. With a few exceptions, the billionaires’ dump is the time of the economy 4.0.
The other feature of digital platforms is providing trust and reliability. It means checking the potential suppliers one way or another. It is rating systems where users assess providers using digits and reacting if their ratings are negative. It must be done with thousands of thousands of suppliers by setting up proper algorithms and not by hand. Warranties and indemnities in case of a claim should also be provided. It is still something that must be improved by many platforms. The same, of course, works the other way round. If a customer is a buyer of a product, a platform has only to provide for payment. It is nothing complicated to arrange. But if this is a service like Airbnb, the suppliers must also be somehow protected by the platform. What happens, for example, if a guest devastates the host’s apartment? If you read opinions on the Airbnb service carefully, you would know that although guarantee is theoretically provided, this is still not as good as possible. The latter is about maintaining the proper balance between algorithms working and real-staff who could take over the harsh cases and carry them out for the client on behalf of the platform.
Last but not least, this is payment and logistics. As far as fees are concerned, we could have paid with the credit cards or debit cards for as long as I remember, just by giving the number, name, the expiry date, and the free digit control number. Today you can still pay with your card and use some systems like PayPal, the one developed or improved by Elon Musk, or just make a quick transfer being redirected to your bank on only one click. And there is also the logistics. At platforms, you can use different courier services, often on a long-term contract with the platform operator, and internal logistic services developed by the platform operators themselves. And in most cases, as a customer, you do not pay for those services from a certain purchase amount. The financial arrangements are set between the platform and financial providers or logistics operators beyond its customers’ scrutiny.
UNILATERAL PLATFORMS VS MULTILATERAL PLATFORMS
Basically, we can differentiate between unilateral platforms and multilateral platforms. A unilateral platform is technically another sales channel for a company that, besides traditional trade, went online and kept the analog business or got rid of it. An excellent example of a unilateral platform is online shops run by hypermarket chains. Your order via Internet products from different manufacturers and you get home delivery. You also enjoy all the functionalities I mentioned above. Those kinds of platforms do not have quite much in common with the sharing economy and lateral peer-to-peer trade. It is a typical vertical value-added chain. You buy from the hypermarket and not directly from the manufacturers.
The peer-to-peer platforms are something else. They match supply and demand, allowing cutting all middlemen between supply peers and the demand peers. Unlike in vertical structures, they do not buy goods and push them alongside the final customers’ value chain. They are only a kind of matchmaker.
Peers who they match with each other can be manufacturers of products who sell products to the final customer. This trade is peer-to-peer. As far as the matchmaking is concerned, the sky seems to limit possible kinds of matches. By far, it is not only about selling goods.
Uber is a platform matching passengers who need a lift with drivers who have a car, some spare time, and are willing to give a ride to somebody. An Uber driver can also be a professional driver who makes his living driving for Uber. But this is not the precondition.
Not everybody realizes that the e-scooter business is also multilateral platform-based. The scooters are the platform operator’s property, but it’s not the platform that collects them, charges the batteries, and moves to where they are needed. The e-scooter apps work two-way. One is designed for those who rent the scooters, the other one for the so-called juicers, who are people ready to pick up the scooters shown on a digital map, take them home, charge the batteries usually overnight, and in the early morning bring them to a place indicated by the platform. For each e-scooter serviced this way, they get a fee.
Another example of such a matchmaking platform is scheduling platforms. People who want to make appointments with doctors, dentists, hairdressers, barbers, beauticians, and manicurists use only one app, also used by those service providers to book a visit and are offered a personalized calendar. The service providers see only their end of the calendar, so only those who booked a visit with them.
Exchange platforms are about matching needs with appropriate resources that meet those needs. Both sides are customers to the platform. What is essential in the case of the multilateral platform is at least two kinds of customers, complementary customers but disjoint as far as their specific needs are concerned.
Facebook is a kind of matchmaker, as well. The first group of customers is Facebook users; the other group of customers is advertising companies. Facebook users do not want to see advertisements. They want to see content from their fellows, and watching advertisements is the price they pay. The advertising companies are not interested in the content provided by Facebook users. They are interested in their detailed profiles as far as the interests are concerned. So, although meeting the condition of at least two disjoint groups of customers, Facebook is not about a proper peer-to-peer exchange. Customers are disjoint, but not exactly complimentary.
Now another division that is very important for the customers of exchange platforms. It is single homing vs. multihoming.
Single homing is when a customer, no matter whether this is a supplier or a buyer, uses only this one platform to look for the matching peer. For example, if, as a customer, I need a streaming service, it is up to me whether I pay for Netflix, HBO Go, or Amazon Prime. I can use one of those services; I can use all of them or change from time to time. Using only one service would be a single homing. Using at least two of those services would be multihoming.
Those who offer apartments for short-time rent can use booking.com or Airbnb or some other service. I never provided an apartment for those services, but I noticed that a small block of apartments I use each time I go to Brussels, does not have any web page, does not use Airbnb, and relies only on booking.com. I cannot contact them through any other channel only solely through email redirected from booking.com. Of course, in the meantime, I have their email, but this is only because I was there a couple of times, And I specifically ask for it. But as I understand, they have some exclusivity agreement with booking.com. This practice of exclusivity we call single homing.
From the seller’s perspective, it gets problematic if the single homing is forced out. If you try to sell your products or your service through another channel, you risk being thrown out of the system. Simultaneously single homing means dependence. If the platform has a monopoly on distributing your goods or services, it may start to behave like a monopolist and increase the fees. You are then between two stools. Either you pay more or are fired out of the system, and you lose your customer base. It may also happen that the platform knew that your goods are bestsellers, is copying them and selling as own goods under their trademark. You lose your market share because you are practically forced out of the market by a competitor who you treated only as an intermediary.
Data is one of the most valuable goods today. An exchange platform is a perfect tool for collecting and analyzing data on actual sales, best sellers, increasing market shares, customer preferences, customer behavior, etc. For years, many of the data available for platforms were the most confidential data of many companies, enabling them to succeed in the market. Joining an exchange platform means revealing this information to a potential competitor.
HOW A MULTILATERAL PLATFORM WORKS
The major difference between an online business by a production company or a shop that runs an online business that sells goods through the Internet and an exchange platform is the type of customers. A digital platform, or better to say a multilateral exchange platform has at least two disjoint complementary groups of clients. As buyers, we often do not realize that suppliers or just manufacturers are also customers to the platform.
Let me yet again give here the example of e-scooters. This is some different type of commercialized sharing where the platform is also the owner of scooters. And those two different groups of customers are those who use scooters, but also those who work for the platforms as juicers. The word ‘work’ should be rather used here in quotation marks. Those people work for the e-scooters platforms, but technically speaking, they are their customers as job takers. They are not employed by the platform. They only share their free time and electrical sockets with e-scooters users for a fee. They have no obligation to work daily. They just check the application, whether there is a decent workload to do, and each time may decide whether they work at the very night or not. This turns upside down that what we know about employment. And believe me, many of those guys were naive enough to think that this was fixed employment like it is in the case of Uber. No, it wasn’t. It was kind of seasonal. In winter, as people did not use bikes that often as in summer, there was no workload at all or fees for pickup, and charges were that low that working would only be depriving oneself of the goodnight sleep for nothing. The platform having fewer users applied here dynamic pricing. Fewer users meant less workload and less money for juicers. And the platform had no obligations against them.
Digital platforms generate huge reciprocal network effects. An increase in the number of clients in one group increases the benefits for clients in the other group. The buyers have a great variety of products and services to choose from. The sellers widen their customer base.
The other characteristic feature of exchange platforms is the reduction of transactional costs that finally result in what I’ve already called zero or near zero marginal cost >>>. The first that comes to mind here is the economies of scale, range, and scope of activity due to aggregation in one place of many clients from complementary groups. The implication here is comparable, although on a bigger scale, with the difference between a small shop run by a family and a huge hypermarket chain. If you trade in bulk quantities of the same product, you can afford lowering margins, something that a small retailer cannot afford. This is why if you want to do a big shopping you go to a hypermarket and only to buy several products or a single product you go to a family shop. But the advantage of bigger hypermarket chains is sophisticated logistics allowing for cutting the transport, warehousing, and inventory costs. I will skip here explaining to you the nature of those processes. But believe me, this does not only lower margins that allow hypermarket chains to lower the prices. It is also cheaper logistics. In the case of a multilateral exchange platform, the economies of scale are also twofold. First, you increase your customer base so you can allow for lower margins. Second, as you are not the only supplier under the platform, the platform is offering not a single kind of product, but a huge variety of products, the number of companies using the service lowers also required margins by financial systems and logistics providers. So besides the margins also transactional fees are at a shallow level.
Exchange platforms allow for cutting informational asymmetry, as well. If you remember your first lessons in economics, theoretical economics, you’ve probably heard of market failures. One of them that often let the differentiation of prices on the same product to buyers’ disadvantage was that not following all the offers, they sometimes overpaid for specific products. Although we still can see huge differences in prices of the same products offered by different web pages, price comparison websites allow the customers to bargain by presenting offers and search options. The same, of course, happens within one big exchange platform. If talking about online shopping, you must be aware that companies offering higher prices of products that we can buy much cheaper elsewhere are sometimes even not interested in trading with those products. They maintain a higher price on them because they do not have them in stock. They would order only if you order, but keeping this specific product in the offer allows them to show up with a huge variety of products the customer can seemingly choose from. It is more about marketing than sales. As a customer, you select a cheaper alternative, not even knowing that this alternative is the product the online shop targets to sell.
Talking prices for each of the customer groups using a platform, we have to remember that supply must match demand also as far as quantity is concerned. This balancing comes with setting up the equilibrium price. If you run an online business and try to sell something you do not have in huge amounts on stock at a relatively low price, even if you actually would earn on that, your primary problem will be that you will not be able to meet the demand. To protect themselves from this to occur, the big platforms apply asymmetric pricing strategies to balance between those groups. If you have a huge buyer base, but not enough suppliers, it’s enough you lower the entry fees and service fees for the suppliers and put on if possible some percentage on transactions seen by the buyers. You would have to allure more suppliers and stop some buyers from buying. With an increasing supplier base, you would still keep lower fees and decrease the percentage. You probably also do not realize that the 4.0 economy and digital technologies allowed first the so-called real-time or dynamic pricing techniques.
You probably use Uber, so you know that they change prices to match supply with demand. In peak hours, the prices are usually higher. The same base of drivers has to somehow service the peak number of passengers. But let me give here another example from the sharing economy this time commercialized sharing of cars. People who use those cars are from the perspective of the platform, not only users or drivers, but also they can be treated as a pickup service the delivers vehicles to areas where they are needed. It is similar to what juicers do but more sophisticated. For example, in Hamburg, a car-sharing company lowers fares for people who want to go against the traffic, so take a car from the area that currently is the destination of most trips to the area we’re at the very hour the most trips begin. So if you go as most of the traffic does, you pay a higher price, and if you go against the traffic, you pay a lower price.
Photos by Andrew Neel, JMA, Markus Spiske, Andrea Piacquadio