The impacts of platforms

Concerns in the larger research body of research on platforms often leads to a subset looking into the impacts of the platform economy.  Let’s try some more digests responding to questions.

• A. Is a shift to platforms considered as disruptive innovation?
• B. Do network effects lead to a platform economy of “winner take all”?
• C. With digital platforms based in information systems, what are the opportunities for knowledge effects?
• D. What is the logic of participation on a platform?
• E. Should platform capitalism be seen as positive or negative?
• F. As an alternative to platform capitalism, should platform cooperativism be considered?
• G. In the larger context of the sharing economy, how might platform initiatives be categorized?

The rise of the platform economy may be described either by the metaphor of “We Don’t Know Who Discovered Water, But We Know It Wasn’t a Fish” or the fable of the “Boiling Frog“.

A. Is a shift to platforms considered as disruptive innovation?

In a clarification about definition of disruptive innovation, Clayton Christensen doesn’t see Uber as disrupting the taxi business, because (i) the innovation doesn’t original on a low-end or new-market foothold; and (ii) the innovation doesn’t catch up with mainstream customers until quality catches up to their standards.  With disruptive innovation seen as a process, Uber is categorized by Christensen as as an outlier to the taxi business, offering a better quality service in the regulated taxi industry. That outlier might be described by Nassim Nicholas Taleb as a black swan.  Christensen does see UberSELECT as disruptive to the limousine or “black car” business, as that service has attacked the low end of incumbents by not accepting advance reservations. [Christensen, Raynor, McDonald. (2015)]

In a contrary view, Juan Pablo Vázquez Sampere sees platform innovation as different from product innovation.

How does disruptive innovation differ when it’s applied to a product versus a platform?

• For the sake of clarity, let’s call a product “a platform that is used for one or very few products” and a platform “a structure upon which many variations of products are built.” These definitions recognize that product vs. platform isn’t black-and-white ….

Similarly, it’s useful to distinguish between types of disruption.

• There’s high-end disruption, which means entering the market with a product or platform that is superior to incumbents’ offerings …. Starting a high-end disruption is expensive and challenging, requiring a lot of capital up front. […]
• A second option is low-end disruption, which is making a product or platform more affordable and simpler to use. [….]  … they gain market foothold with the incumbents’ least-profitable customers.
• A third type of disruption is new-market disruption, which emerges from nonconsumers and usually creates a new category, or even new industries. […]   Again, they didn’t initially challenge incumbents directly; they gained a market foothold in an adjacent space.

In all the examples above, a company engaged in a disruptive process using a product. But it’s also possible to engage in all three kinds of disruption via a platform.

• Platform-based high-end disruptions are very uncommon, mostly because they are expensive to fund and bring to profitability, though the few that exist get a lot of attention. […]
• Low-end platform disruptions make things cheaper and more affordable for overserved customers. […] Unlike low-end disruptive products, low-end platform disruptions can change the dynamic of an entire industry.
• Then there’s platform-based new-market disruptions. They not only create new categories but also enable a whole new population of people to make money (think of Airbnb, ING Direct initial deposit, Quicken for your taxes, etc.). Like new-market product disruptions, when they begin they’re not even on the radar of incumbent firms. But the effects reach further because what the incumbent once considered a toy is now challenging the economics of a product and the entire rationale of how that entire industry is going to work.

… platform-based disruptions have effects not only inside the industry but also well beyond industry boundaries. They can create strange competitive bedfellows as companies in different industries are affected …. They can even cause industries to collapse ….And they can enable massive numbers of people and businesses to make money from excess capacity ….

While it’s difficult for incumbents to respond to disruptive products, it’s even more difficult for both incumbents and regulators to respond to disruptive platforms. Incumbents that are used to dealing with product-based competition often don’t know how to react to a platform that competes at an ecosystem level, ….  [Vazquez Sampere (2016), editorial paragraphing added]

The usefulness of disruptive innovation theory — following Christensen’s original conditions of a sustaining innovation that overshoots customers needs — has been challenged [King, Baatartogtokh (2015)].  A shift to a platform may be seen as a disruption, it may not be have the sense of a “disruptive innovation” where the company is vulnerable to competition from unexpected sources [Gans (2016)].

B. Do network effects lead to a platform economy of “winner take all”?

While the platform economy is driven by network effects, they are not a sufficient explanation of success.  David S. Evans and Richard Schmalensee write:

Network effects are now central to a debate about whether online platforms are “unstoppable.” A recent argument in this debate is that online platforms have troves of data that make network effects even more potent.

Unfortunately, this view of network effects evolved from a seminal economic contribution to a set of slogans that don’t comport with the facts. [Evans, Schmalensee (2017), p. 36].

Continuing with “The Economics of Network Effects”, these researchers see past the hype of success with the reality of downside risks.

Network effects are usually indirect, between different kinds of customers, rather than direct, for the same kind of customers.   [….] [p. 37]

Network effects result from getting the right customers, and not just more customers.  [….]

Network effects can work in reverse.  Networks can have exponential growth when every additional customer attracts more customers. Unfortunately, the same principle can lead to exponential decline. Each lost customer induces other customers to leave, which induces more to leave. We see the physical manifestations of reverse network effects all across America in the form of dead or dying malls. Fewer people come to a mall, stores pull out of the mall, leading to even fewer people coming.

The early literature on network effects didn’t pay much attention to the potential for this reversal of fortune. Economists initially focused on physical networks, such as telephones, where physical connections and equipment made it harder for people to switch networks. It is much easier for people to switch online platforms. They can typically try a new platform without dropping the old one, probably for free, and gradually shift over if they like it. Adding or dropping a platform often just involves a few clicks. [Evans, Schmalensee (2017), p. 38].

This orientation for this research article leans towards competition policy makers, so antitrust investigators are encouraged to look deeper.

C. With digital platforms based in information systems, what are the opportunities for knowledge effects?

While technology is presumed in definitions of platforms, there isn’t a strong distinction between hardware into which designs are frozen, and software that mediates information, and therefore can evolves and may cocreate value through knowledge.  Lynne Kiesling extends three prior streams of research on platform architecture, and proposes a complementary fourth lens.  Three well-referenced sources are first cited.

• Technological lens: A technology platform is a common core of technologies within a modular architecture, with variable technology elements around the periphery that interoperate with the core technologies and architectures. [Kiesling (2018) p. 4, deriving from Baldwin, Woodard (2008)]
• Economic lens: An economic platform is a means for facilitating and coordinating mutually-beneficial exchange through transactions in a two-sided or multi-sided market (Rochet & Tirole 2003)
• Organizational lens: An organizational platform can provide institutions that enable the coordination of the actions and plans of agents (be they individuals or firms) within a technology platform for mutual economic benefit, and it can have different organizational form in different industries and contexts. The organizational lens encompasses the three dimensions of an institutional framework: firm structure, market structure, and regulatory structure. [Kiesling (2018) p. 4, deriving from Gawer (2014)]

To these three lenses, Kiesling adds a fourth.

• Epistemological lens:  Platforms are epistemic frameworks for decentralized coordination. Digital technology, multi-sided markets, and governance combine to take the technology-induced transaction cost reductions and create value by accessing diffuse private knowledge that was inaccessible pre-platform and creating new forms of exchange that lead to new knowledge generation in the discovery procedure. Platforms change the context of market activity in ways that bring new forms of knowledge into existence.  [Kiesling (2018) p. 11]

Agents discover, use and communicate knowledge on digital platforms

Platforms have three epistemic dimensions:

• access to and aggregation of diffuse private knowledge,
• actionable contextual knowledge where it was not actionable before , and
• creating knowledge within the platform interaction itself. [Kiesling (2018) p. 11 ] [….]

Diffuse private knowledge
[….]  Technology platforms … enable such knowledge aggregation where it was not before possible. Platforms arising out of the lower transaction costs of digital technology expand the volume and scope of activity over which using market processes for decentralized coordination creates mutual benefit. [….] [Kiesling (2018) p. 11 ]

Actionable contextual knowledge
Platforms increase opportunities for individuals to engage in exchange and thus to act on their contextual knowledge in ways that were not available to them before.  [….]

Platform as discovery process: new knowledge creation
By enabling deeper and broader decentralized coordination through exchange, platforms create discovery processes. Some knowledge relevant to such coordination does not exist outside of the market context; such knowledge is either created in the process of market interaction, tacit knowledge that is not consciously known …, or inarticulate knowledge that is difficult to express or aggregate ….  [Kiesling (2018) p. 12 ]

Platforms construct shared meaning through involving “the representation of knowledge as symbols, or symbolization: language, money, and interoperability”.

Interoperability plays an important role in creating shared meaning in technology platforms, and consequently in market platforms and the institutional-organizational context. [….]  This choice to coordinate on a standard embeds shared meaning in modular technologies and systems, and then can layer on markets and organizations on that technological foundation.[Kiesling (2018) p. 15 ]

Digital platforms are modular and are able to operate with a loose interdependence that both exploits diffuse knowledge and enables better knowledge creation through exchange.

Platforms do this by reducing the costs of and enabling three types of consequences: decentralized coordination for mutual benefit, innovation, and error correction. These consequences all result from applications of social learning and taking actions/making choices.  [….]

Decentralized coordination for mutual benefit
… without a platform and the transactions it enables, the knowledge does not exist. Because knowledge is itself emergent and is contextual, it often does not exist outside of a market process.  [….]

Innovation and experimentation
[….]  In dynamic markets with diffuse private knowledge, neither entrepreneurs nor policy makers can know a priori which goods and services will succeed with consumers and at what prices.  [….]  Experimentation makes learning possible and creates knowledge that would not otherwise exist, including the knowledge embedded in new products, services, and value propositions. [….]

Error correction 
Platforms enhance error correction by harnessing transaction cost reductions, providing more timely information, and enabling individuals to respond more quickly (and even autonomously) to updated  information.  [Kiesling (2018) pp 15-19]

The epistemic lens supports opportunities for learning.  Platform participants can gain knowledge through continuing interaction.

D. What is the logic of participation on a platform?

The introduction of the Internet in the 1990s positioned platforms to solve coordination problems in market exchange.  With maturity, platforms can evolve to intensify interactions between participants.

… platform intermediation targets the ostensible opportunities offered by network effects and the so-called ‘co-creation’ of value between users. In van Dijck’s (2013) succinct terms, platforms are not simply in the business of intermediating connections, but of actively curating connectivity [Langley, Leyshon. (2017) p. 13]

A platform “materialises through a particular configuration of socio-technical practices”.

To a greater-or-lesser extent, different platform types attempt to enrol participants who are figured not as ‘consumers’ but as ‘users’ who ‘co-create value’.  […]  Put differently, … the intermediation of networked economic connectivity features the summoning-up of the popular passions and interests of what they call the “platformed masses”. [Langley, Leyshon. (2017) p. 17]

… platforms are not utilities or conduits that simply channel circulations. Platforms actively induce, produce and programme circulations. … platforms realise and act upon data (through archiving and algorithms, for example) in ways that feed-back, structure, delimit and even determine the circulations of popular culture. [Langley, Leyshon. (2017) p. 19]

In order to scale, platforms attract investment by venture capitalists.

… according to the business model, the success of all platform types turns, in the first instance, on significant investment in the technology and know-how necessary for the design and operation of an infrastructure which has to ‘scale’ as a matter of priority (i.e. rapidly and consistently add users). [….]

… it is ‘connection’, ‘attraction’ and ‘flow’ that determine the success or otherwise of a platform’s scaling strategy.

Connection, which refers to the ease by which others can connect to the platform ‘to share and transact’, will for some platforms mean making its API freely available, while for others it will be the ease with which users can add and store content or exchange, share, borrow, invest, and so on.

The more straightforward the process of connection, the more attraction the platform will generate as a market network for users.

Finally, connection and attraction ensure that the ‘co-creation of value’ between users will flow through the platform. This process has also been described as a ‘flywheel’ that, when in motion, seems to gather its own momentum to generate direct and indirect network effects. [Langley, Leyshon. (2017) p. 21, editorial paragraphing added]

Even if a platform company is able to exit venture capital funding, its sustainability may continue to be suspect.

E. Should platform capitalism be seen as positive or negative?

Beyond simple economic modelling, platform capitalism can be portrayed from (i) a neoliberal narrative, or (ii) a progressive counternarrative.

The neoliberal narrative of platform competition lionizes currently dominant firms, looks with suspicion on virtually all regulation of them, and gives current consumer interests far more weight than those of other stakeholders.

A progressive counternarrative of platform capitalism is more skeptical of currently dominant firms, promotes regulation as a necessary limit upon their power, and balances the interests of current consumers with those of future consumers (who may want the option of choosing small players who would be driven into oblivion by the current monopolist without state intervention), workers, and others. [Pasquale (2016) p. 317, editorial paragraphing added]

The conventional narrative and counternarrative serve as a potential counter-history, when looking back from the future.

Table 1 Narratives of Platform Capitalism [Pasquale (2016) p. 311]

Conventional Narrative	Counternarrative
Platforms promote fairer labor markets by enabling lower-cost entry into these markets by service providers.	Platforms entrench existing inequalities and promote precarity by reducing the bargaining power of workers and the stability of employment.
Platforms reduce the impact of discrimination by increasing the number of service providers in transportation, housing, and other markets.	Platforms increase discrimination by identifying customers with picture- based profiles which reveal their race or racially-identified names. Ranking and rating systems can also reinforce bias.
Regulators of platforms are likely to reflect the biases and interests of incumbent providers (like taxis and hotels) thanks to incumbents’ political ties.	Large platforms now command so many resources that their own lobbying efforts can easily swamp those of fragmented and uncoordinated incumbents.
Large digital platforms have gained massive market share because of the quality of their service.	Large digital platforms have gained massive market share because of luck, first-mover advantage, network effects, lobbying, strategic lawlessness, and the unusually low cost of investment capital due to quantitative easing
Platforms promote economic growth by drawing the un- and under-employed into the labor market.	Platforms undermine growth by reducing wages as workers scramble for gigs by offering to complete them for lower wages than their competitors.
Platforms promote flexibility by breaking down jobs into tasks, enabling workers to piece together work at their own pace.	Low-pay gigs and piecework force workers to be “ready for duty”constantly lest they miss an opportunity to work
Using data-driven profiles of users, platforms can preemptively channel them to the workers they are most compatible with.	Users may experience loss of agency when serendipitous or unpredictable options are effectively hidden or obscured.

Platform capitalism leaves the prospects for higher levels of employment for workers as pessimistic, despite large businesses having a glut of cash [Srnicek (2017)].

F. As an alternative to platform capitalism, should platform cooperativism be considered?

Platform capitalism is seen as generating profits for the few, increasing income inequality.  An alternative is proposed.

The concept of platform cooperativism has three parts:

• First, it is about cloning the technological heart … but wants to put it to work with a different ownership model, adhering to democratic values …  It is in this sense that platform cooperativism is about structural change, a change of ownership.
• Second, platform cooperativism is about solidarity …. Platforms can be owned and operated by inventive unions, cities, and various other forms of cooperatives, everything form multi-stakeholder and worker-owned co-ops to producer-owned platform cooperatives.
• And third, platform cooperativism is built on the reframing of concepts like innova ion and efficiency with an eye on benefit ing all, not just sucking up profits for the few. [Scholz (2016) p. 14]

A preliminary typology of platform co-ops includes:

• Cooperatively Owned Online Labor Brokerages and Market Places
• City-Owned Platform Cooperatives
• Union-Backed Labor Platforms
• Co-operatives from Within … [through an existing organization going through a hostile takeover by workers]
• The Platform as Protocol … [through peer-to-peer rather than centralized platforms]

Ten principles for platform cooperativism are proposed, with descriptions of organizations already on the proposed path.

G. In the larger context of the sharing economy, how might platform initiatives be categorized?

The label of a sharing economy has murky origins, but may be related to as a description of a modality of economic production [Benkler (2004)].  Reviewing the literature, the sharing economy is seen as resting on three foundational cores:

• (1) Access economy
• (2) Platform economy
• (3) Community-based economy

The access economy covers a set of initiatives sharing underutilized assets (material resources or skills) to optimize their use. Many definitions of the sharing economy are built on the idea of optimizing underused assets to promote access instead of ownership …

We define the platform economy as a set of initiatives that intermediate decentralized exchanges among peers through digital platforms.  Platforms are gaining considerable weight in contemporary capitalism …

The community-based economy … refers to initiatives coordinating through non-contractual, non-hierarchical or non-monetized forms of interaction (to perform work, participate in a project, or form exchange relationships). Rather than the creation and maximization of economic value, the primary purpose of initiatives belonging to the community-based economy is to contribute to a community project, to create social bonding, to promote values or to achieve a social mission through a collective project. While communities traditionally involve strong social ties among close members interacting at a local level …, digital innovations have created forms of ‘social sharing’ across communities of weakly connected individuals.  [Acquier, Daudigeos, and Pinkse (2017) pp. 3-6]

With the three economy cores described above, dual-core initiatives can may aid navigating some of the tensions and paradoxes.  They are:

• Access platforms
• Community-based platforms
• Community-based access

Figure 2 Combining the cores of the sharing economy

A first set of dual-core initiatives — Access platforms — give access to underutilized resources, or services, through digital platforms.

• However, access platforms are not entirely without critique. [….] Access platforms suffer from the adverse effects of high scalability and a skewed focus on benefits for shareholders and users to the detriment of others. In addition, the conjunction of scalability and access gives rise to new tensions or amplify those related to the access and/or platform economy.  [….]

A second set of dual-core initiatives — Community-based platforms — … harness the scaling power of platforms for the good of the community, either by using a governance mechanism that ensures redistribution to balance stakeholder interests or by orienting the purpose of the plat form towards the community interest. The first case refers to what has recently been called ‘platform cooperativism’, a label referring to platforms that open their governance structures to a broader group of stakeholders than investors alone ….

• Notwithstanding their promise for coming up with alternative modes of organizing the sharing economy, community-based platforms suffer from intractable tensions between scalability and community interests. Platform cooperatives have to deal with the trade-off between attracting regular impact investors and adopting alternative redistribution schemes that may frighten off such investors. Such platforms therefore struggle with competition from pure market players that can more easily raise funds. Mission-driven platforms experience a tension between global reach and local audience.  […]

A third set of dual-core initiatives — Community-based access — … afford greater access to underutilized resources and services at the community level and thus aim to fulfil the economic, social, and environmental promises. Initiatives that promote sharing practices in a well specified physical space such as makerspaces, hackerspaces, fablabs, and repair cafés fit this category  ….

• Nevertheless, community-based access initiatives also have limitations because they rely on a non-monetary and non-hierarchical coordination mechanism to grant all users access in an equitable manner.  … users either struggle with the idea of letting go of monetary value altogether or they devise alter native currencies that fulfil the same function as money.  [….] [Acquier, Daudigeos, and Pinkse (2017) pp. 6-8, editorial paragraphing added]

A triple-core intersection (i.e. of access, platform and community-based economy is seen as a contradictory ideal that would not survive the paradoxical nature of the sharing economy.

Compared to the long history following the Industrial Revolution, research into platforms is still nascent.

References

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