The New Economics of Multisided Platforms

In March, the NYTimes posted an interesting article, titled:

Platform Companies Are Becoming More Powerful — but What Exactly Do They Want?  (Source)

It discussed how a “platform business” is “one built around matchmaking between vendors and customers. If successful, a platform creates its own marketplace; if extremely successful, it ends up controlling something closer to an entire economy. ”

A quote that resonates with us at Make/Grow Local is this:

Among them is their tendency to metastasize from transaction enablers to, with sufficient success, participation gatekeepers.

Let’s bring it local: be careful about which basket you place all your farm-raised eggs!

The local movement needs to avoid a platform monopsony

Word of the day: monopsony.

Our mission is to guide the local-made, local-grown movement away from potential online platform monopolies and monopsonies. It’s what happens when an “aggregator” platform grows to dominate the market, thus removing agency and control from the sellers and the buyers.  With Make/Grow Local founded as a non-profit, run by and for the community, this can’t happen.

With other ecommerce platform vendors, it’s what they actually hope happens. Choose wisely!

From wikipedia, Monopsony: In economics, a monopsony (from Ancient Greek μόνος (mónos) “single” + ὀψωνία (opsōnía) “purchase”) is a market structure in which only one buyer interacts with many would-be sellers of a particular product. In microeconomic theory of monopsony, a single entity is assumed to have market power over terms of offer to its sellers, as the only purchaser of a good or service, much in the same manner that a monopolist can influence the price for its buyers in a monopoly, in which only one seller faces many buyers.

At first, today’s online platforms seem great, because they offers a better user experience than individual scattered marketplaces, and don’t the best rise to the top, benefitting all parties?

This monopoly, though, is a lot different than the monopolies of yesteryear: aggregators aren’t limiting consumer choice by controlling supply (like oil) or distribution (like railroads) or infrastructure (like telephone wires); rather, consumers are self-selecting onto the Aggregator’s platform because it’s a better experience.  [Source: Stratechery article on monopolies and monopsonies.]

What happens next, however is the problem: the platform that wins will set the terms of engagement for both buyers and sellers; it owns the middle, and can set prices, change the rules, and exercise unwanted power over the market.

One more implication of aggregation-based monopolies is that once competitors die the aggregators become monopsonies — i.e. the only buyer for modularized suppliers. And this, by extension, turns the virtuous cycle on its head: instead of more consumers leading to more suppliers, a dominant hold over suppliers means that consumers can never leave, rendering a superior user experience less important than a monopoly that looks an awful lot like the ones our antitrust laws were designed to eliminate.

We’ve seen this with every commercial platform, from HomeAway to Elance Uber to Amazon to AirBnB: drive the competition out of business with “free” or low-cost, then raise prices and monetize everything and reap billions of dollars as the next “unicorn” business.

So, to our Maine community of growers and makers, and our kindred local growers in other states: be careful about the platform you choose to sell your B2B goods through… choose the only nonprofit, community-owned ecommerce solution that was built for you.

A lesson about free and freemium

Why was Make/Grow Local founded as a nonprofit? Because “free” doesn’t stay free in a market economy (aka capitalism).

Unless a platform is owned by the participants and communities, the funding forces that created the commercial platform will one day expect large returns on their investments. They do this by “monetizing” their captive audience, once it gains marketshare/traction and possible dominance. The loss leader (the free service) wins participants, and then when they are dependent and can’t easily leave, the fees begin (or increase).

As an example of how this monetization is inevitable, an essay on no-longer free online learning courses studies the trend:

Massive Open Online Courses used to be 100% free. But they didn’t stay that way. As MOOC providers focussed on finding a business model, they started putting certain aspects of the experience behind a paywall, hoping to get more people to pay. MOOCs went from “free” to “free to audit.” This shift to a freemium model — with more and more chances to up-sell — seems to be working for the providers. The top three services earned more than $100 million combined last year.

So in the race between various solutions in the marketplace now, Makers and Growers (and Buyers) should carefully consider in what basket they place all their eggs.

Distribution matters

Local goods and food producers need to be aware of the power of platforms, and strive to make them work for them, not against. A community-owned discovery and distribution platform like MakeGrowLocal is essential.

In the digital world, the distribution of goods and services is essentially free. Amazon, Google, Facebook, Uber, Netflix: They’re are all distributors. But because the internet makes it almost trivial for makers to connect with consumers, these companies are also the world’s best aggregators — the ones that suppliers have no choice but to work with. As of December, the 10 most valuable public consumer internet companies, which together represent over a trillion dollars in value, were all aggregators.

In the physical goods world, where the food growers and local  artisans create and deliver their goods, distribution platforms that aggregate the market’s demand must provide streamlined, friction-free user experiences, for sure, but must also create efficiencies in the sometimes unprofitable business of logistics and last-mile delivery.

distribution and last-mile flywheel

An important thought:

Success doesn’t automatically spring from owning the best interface between a supplier and a consumer, as is the case for most firms in the current era. For the growing number of startups involved in moving physical goods or services, owning and controlling distribution is absolutely a core competency—a vital part of the flywheel—and not just a commodity.

Two articles for further reading: an article discussing networks from FreshDesk, and Ben Thompson’s aggregation theory.