Platforms and Networks 101 (Pt. 1/2)

One of the most enjoyable classes during my MBA was Industrial Economics by Robert Pindyck. One of the most insightful topics we discussed in that class was Platforms and Networks. Today, I'll be sharing what I believe are core concepts for anyone who works at or aims to build a tech company.

Platform mediated networks have revolutionizshare we interact and do business today.

What exactly are platform-mediated networks?

You have already used many of these platforms without even realizing it. Some popular examples include eBay, Uber, and Airbnb.

To better understand platform-mediated networks, let's break them down into their essential components:

1. Network Users: These are the people or organizations that engage with the platform to access its services or interact with other users. Network users can be further divided into two groups: supply-side (e.g., sellers on eBay, drivers on Uber) and demand-side users (e.g., buyers on eBay, riders on Uber).
2. Platform: This is the central hub that enables users to interact and transact. It comprises various components, such as technology, software, rules, and policies governing user behavior.
3. Platform Intermediaries: These are the entities that create, maintain, and manage the platform. They can be categorized into three roles: platform providers, platform sponsors, and platform component suppliers.

Now onto the roles and types of platform intermediaries:

• Platform providers are the primary point of contact for network users and mediate their interactions.
• Platform sponsors hold the rights to modify the platform's technology and decide who can participate in the network. They don't necessarily deal directly with network users.
• Platform component suppliers provide essential goods and services related to the platform but not offered directly by the platform providers.

Platforms can also be classified based on their structure and function. Structure-wise, there are four types of platforms:

1. Proprietary Platforms: These have a single sponsor as its sole provider, like Apple Macintosh or Sony PlayStation.
2. Shared Platforms: Multiple firms collaborate in developing the platform's technology and then compete with each other in providing differentiated but compatible versions of the platform, such as Visa or Linux.
3. Joint Venture Model: Several firms cooperate in developing the platform, but a single entity serves as its sole provider (e.g., the online recruitment site CareerBuilder).
4. Licensor Model: A single company develops a platform's technology and licenses it to other providers (e.g., American Express licensing MBNA to issue its cards in 2004).

Function-wise, platforms can be categorized into four groups:

1. Connectivity Platforms: Facilitate point-to-point transfers of information, goods, or passengers between two parties or locations (e.g., email or package delivery services).
2. Variety Platforms: Serve multi-sided networks and elicit offers from supply-side users that vary along dimensions valued by demand-side users (e.g., video games or movies).
3. Matching Platforms: Help users from two distinct groups with heterogeneous needs and offers discover suitable transaction partners (e.g., online recruitment sites or dating services).
4. Price-Setting Platforms: Disclose the price at which users are willing to exchange well-defined items (e.g., securities exchanges, auctions, or gambling bookmakers).

Tomorrow, I will write Part 2 in which I'll write about the implications of platform-mediated networks and how they've shaped the modern business landscape.