The Platform Economy

As the third decade of the 21st century begins, the power of digital platforms to disrupt industries is impressive. But the time may have come for tech companies to take more responsibility for the content on their platforms.

For the uninitiated, a platform is essentially a marketplace that connects goods and services with people who want to buy them, bringing together producers and consumers in high-value exchanges that disrupt traditional industries and incumbent players. Companies such as Facebook, Google’s YouTube, Twitter, Amazon, Uber, and Airbnb have all been built around this concept.

These online platforms play an important role in the economy and have insinuated themselves into people’s everyday lives, often serving as gateways for how goods, services, and information and even people access each other. They deploy bespoke software systems to connect content creators with viewers, sellers with buyers, link riders and drivers and hosts with travelers. But the companies claim no responsibility for the products or services on their platforms.

Economists use the term “network effects” to refer to the way the value of a product or service increases in tandem with the number of people who use it. The idea is that you benefit from aligning your behavior with that of others. The argument goes that the value of a platform largely depends on the number of users on either side of the exchange. The more users a platform has, the more attractive it becomes, creating a virtuous circle.

Once a platform reaches a certain size, the thinking goes, it begins to dominate the market, dislodging incumbents and creating a formidable barrier to entry. Network effects handcuff customers to the largest player.

For example, it is much harder to switch to a different smartphone if doing so means you have to give up all your apps. Online two-sided platforms or marketplaces are among the fastest-growing Internet startups in existence. Among notable two-sided platforms that quickly reached millions of customers were Airbnb, eBay, and Uber.

Instagram is another example. The social media application allows you to follow people of interest and share posts to those who follow you. Having more people on the service means more accounts of interest to follow and more people to interact with your posts.

Social networking sites emulate the network effects strategy used by another brand that has long held a dominant position in the tech industry. When a customer buys one of Apple’s iPhones, one consideration is the number and types of apps that are available on the platform. The company has created a beautiful ecosystem, a bit like the Hotel California: Once you check in, you might never leave.

There is a dark side to these platforms. The dominance of tech companies such as Amazon, Google, and Facebook benefits customers with low prices and access to more data-driven services, but they have also become powerful monopolies, preventing new market entrants. Also, firms such as Amazon, with its considerable market power, throw their weight around by requiring some sellers to provide them with the best prices they can bestow on any online channel.

The dominance of the leading online platforms has invited bipartisan support and scrutiny from lawmakers and regulators in the U.S. and Europe for not doing enough to police platform content. Many lawmakers and regulators have criticized social media platforms such as Facebook and Twitter for the flood of misinformation during the 2016 Presidential election.

The U.S. Department of Justice and state attorneys general have initiated a review of market-dominating online platforms in response to concerns about lack of choice, privacy, transparency, and public safety. Of course, you can expect the leading firms to fight back and defy demands to police content and resist the heavy hand of regulation on their online digital platforms.

As always, they want to regulate their own businesses. You all know how that generally turns out.