Matchmakers: The New Economics of Multisided Platforms

Others, however, must decide whether to start out as a multisided platform or a single-sided firm, and some reverse their initial decision later on

The kind of control that platforms of this sort maintain over service providers shapes providers’ incentives, and these effects must be taken into account in designing the platform. For instance, if tomorrow Uber allowed drivers to set their own fares, competition among drivers would likely lower fares in the short run. This would make riders happier, as long as they could get rides. But lower fares would make driving less attractive, drivers would likely leave Uber, and a system with lower fares but fewer cars might well be less attractive to riders

Multisided platforms operate physical or virtual places where the participants get together. They have to make sure they design these places with a view toward enhancing the value of the direct and indirect network effects between participants

All these issues are harder for a pioneering platform than for an entrant into a relatively mature industry. OpenTable had no models to follow, for instance; it and its mostly forgotten competitors had to work things out from first principles and by trial and error

Multisided platforms operate physical or virtual places where the participants get together. They have to make sure they design these places with a view toward enhancing the value of the direct and indirect network effects between participants

Fundamentally, multisided platforms create value by reducing frictions

An entrepreneur considering whether to start a multisided platform must consider what friction that platform would address, how much of the friction it could eliminate, how much value doing so would create, and whether that is enough to ignite a sustainable and profitable business

At first, there were no fees. Everything was free, as Alibaba worked aggressively to build a critical mass of buyers and sellers to do business

The ability to communicate by e-mail, to interact in chat rooms, and to review company profiles helped reduce another major problem in doing business with distant, and previously unknown, buyers and sellers: whether they could trust each other

A fundamental choice for some businesses is whether to be single-sided or to be a matchmaker, and thereby give up some control to other members of the ecosystem