The Economics of Markets and Platforms

Innovation and Economic Growth, Competition Policy and Antitrust, Networks, the Internet, and Cloud Computing, Internet and Media and Content

Article Snapshot

Author(s)

Daniel Spulber

Source

Journal of Economics & Management Strategy, Special Issue on Platforms (edited by Luis Cabral, Martin Peitz, and Julian Wright), Vol. 28, No. 1, pp. 159–172 (2019)

Summary

Some economic models omit intermediaries, entrepreneurs, and other key factors in dynamic markets. The study of platforms like eBay and Etsy leads to the development of more realistic economic models.

Policy Relevance

The study of platforms sheds light on markets in general.

Main Points

  • A market is a place where economic actors transact with each other, and a platform is a market where digital technologies facilitate interaction.
     
    • A traditional market is often a physical location such as a public square, or a store.
       
    • A platform can be a virtual location such as a website, an online retailer, or an app.
       
  • All markets are multisided markets, as they have buyers, sellers, and transaction mechanisms.
     
    • Early theories highlight the role of entrepreneurs, market makers, and intermediaries in markets.
       
    • The general equilibrium model of markets omits these key actors.
       
  • Economic models of platforms allow for different prices on the buyer and seller sides of the market, and for differences in the quantities of product demanded and supplied by buyers and sellers.
     
  • Models of competing platforms highlight the role of transaction costs and intermediaries in pricing, consistent with older economic theories.
     
  • Platform models reveal the importance of inducements to participate in a platform, such as offers of free content; traditional market models assume that buyers and sellers will participate.
     
  • The platform model helps economists understand the role of firms and entrepreneurs in the economy.
     
    • Entrepreneurs establish firms, and firms in turn establish markets and platforms.
       
    • In standard economic models, the costs of establishing markets are assumed away.
       
    • Innovations that lower market-making transaction costs create opportunities for entrepreneurs to operate platforms, leading to the rise of firms like Lyft and Kickstarter.
       

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