Platform microeconomics

Defining “platform economy” properly has failed, not because multiple meanings of the word “platform” but because multiple meanings of the word “economy”. Economy is simultaneously a very large thing, which includes global institutions, tax agencies, mega corporations and stock exchanges; and a very small thing: a beneficial transaction between two people — a buyer and a seller.

A typical definition of the platform economy emphases the economy-as-a-large-thing, presenting platform economy as a part of the economy that consists of multi-sided markets. According to many using this definition, platform economy is a very small part of the economy. For example, Finnish statistics bureau has estimated that about 0,3% of workers get significant rewards via platform economy.

This kind of “macroeconomic” perspective to platforms hides the peculiarities of platforms and obfuscates the discussions about them. Furthermore, defining platform economy as the part of the economy with multi-sided markets is simply wrong.

A much more insightful perspective to platform economy is “platform microeconomics”, which emphasises the economy-as-a-small-thing. I’m especially interested in transactions because they are the building blocks, the atoms, of the economy. And indeed, there are interesting changes happening on this level.

What I seek to demonstrate is that the “platform microeconomics” perspective allows finding the root causes of platformization of economy. Suddenly, it becomes obvious that multi-sided markets are not the cause of platforms but merely their outcome; and that platform economy is not a part of the economy but instead the next phase of economy.

Platform economy is not about multisided markets

Multi-sided markets have existed for centuries. Previously, they were often misdiagnosed as one-sided markets, or labeled curiosities, as was the case with the so called dual market model of newspapers.

Newspapers had for 100 years dual market model, selling buyers’ attention to advertisers. Their business model also had less well-known additional markets, which allowed them to gather cheap funds for investments, pay less salaries for journalists and gain government benefits and tax reductions.

Truly, newspapers did not suffer foreclosures and layoffs merely because social media had multi-sided markets. The old model had more markets! Furthermore, they did not end up in their difficult market situation just because of digitalisation. They were able to benefit greatly from digitalisation by making their internal processes, information gathering and publishing more efficient. They were, however, unable to change their business model because of deprecated business and economic concepts. For the most part, this situation still remains.

Gains of trade

Especially, newspapers could not reconfigure their business models because platform companies that challenged them had a different implicit concept of economic transaction. This new concept helps platforms to invent business models that create value out of thin air.

Indeed, value can be created out of nothing. The notion of “gains of trade”, originally by David Ricardo, is well-known in economics. Before Ricardo presented his idea on gains of trade, nations operated according to mercantilist ideology. This meant that each nation, with some similarities to companies today, aimed sell more than they bought.

Ricardo demonstrated that international trade can benefit both nations. The goal of the trade is not to gather funds but to create value. Thus, free trade and industrial specialisation always benefits everyone, even in the situations where one nation is superior producer of all goods.

On successful platforms, each transaction benefits every member of the network. Thus, transactions are beneficial even if they normally would not be made due to various kinds of costs. Interactions on platforms are always beneficial because they generate a value surplus, an externality.

The syntax of the basic unit of economics, a transaction, needs to be updated to reflect this. Further, when externalities are added to the syntax of a transaction, the current externalities, which have for too long been brushed aside, become visible.

Platform microeconomics

A transaction used to be defined as a beneficial interaction between two people.

Syntax of transaction in the industrial economy

What is left out of this illustration is the fact that while the seller and the buyer both benefit from the transaction, all the other people are actually worse off due to externalities. The externalities e.g. increase traffic and pollution due to goods produced for transaction.

Every transaction is also part of a bigger system

A key insight is that not all externalities are negative. The new “platform” syntax of a transaction acknowledges that there are externalities that can be beneficial to the network (network externalities, or, in better known terms, network effects). Platforms design their business models to use these network externalities such as data from transactions or vacant products (all unintended vacancy is external).

Platforms use externalities to improve value from individual transactions

Indeed, the “platform microeconomics” has helped us to grasp that that the basic unit of economics is changing. When the basic building block is transformed, the behaviour of the whole system is altered. This means that platform economy is not merely a part of the economy.

Rather, platform economy is the next phase of economy, where companies learn how to increase the value of individual transactions with the network externalities of other transactions. Businesses exploiting this new syntax can design superior business models to almost any industry. Because these business models make many sides of the market visible, companies can create network externalities within, between and outside their market sides.

Broadening the insight to the mathematical theory of communication

All economic transactions are messages. The fair competition based pricing, a capitalist necessity, can work due to this communication system called “the economy”. As noted by Hayek, local knowledge of demand and supply is aggregated to the whole of economy via purchases-as-messages.

According to the mathematical theory of communication, all communication systems have 1) a sender, 2) a medium, 3) noise and 4) receiver. Sender encodes the message that is decoded by the receiver.

The insight in this text was that a transaction has externalities and that thus the basic unit of economy should be and will be reconfigured to reflect those externalities. Further, this reconfiguration is clearly helpful to those companies that intuitively act according to the new definition.

It’s possible to broaden this insight from transactions to all messages.

As with transactions, also in communication the sender and receiver benefit from the message, but they also cause externalities to the larger system. These externalities are for example the increase of noise in channel and the decrease of available bandwidth.

Similarly to new concept of transaction, the new theory of communication acknowledges that in addition to noise, which is “sending to the smaller system from the larger system”, there is the exact opposite of noise, which is “larger system receiving from the smaller system”. A metaphor of this non-noise is a spy, silently listening the messages from sender to receiver.

A new theory of communication

It’s now clear that this is exactly what happens when the message is sent via a platform. Platforms gather the relevant data in all forms of communication, including transactions, to improve the conditions of said communication for all members of the network. This can result in more communication or better communication.

--

--

--

Business model is a story of how a company creates its value. How can we tell a more compelling story?

Recommended from Medium

Is the S&P 500 a good investment during inflation?

False Economic Surges Explained in 5 minutes How You Can Profit

My Story about how top-down wealth redistribution controls local cultural economic choice.

Greed Is An Addiction, And The Top 1% Are Hooked

You just drank all your profits

How Did Carlos Slim Make Billions

Coronavirus and the UK economy: Why this pandemic needs a bolder macroeconomic response

Price Indices and The Inflation Rate

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Johannes Koponen

Johannes Koponen

Researching journalism platforms. Foresight and business model specialist.

More from Medium

Why I Joined Observe, Inc.

Turning up the Dial in 2022: The Next Generation of Technology and IT is Here

Looking at Road Deaths, Baltimore’s Emerging Traffic Problems, and an Attempt at Developing a…

How we run workshops at accuRx