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From the rise to the maturation of the platform economy

Today, digital platform firms are among the most valuable and powerful firms in the world. The COVID-19 pandemic accelerated the movement of social and economic activity online, embedding platforms further into our lives. Consider social media, which saw monthly visits surge by 3% at Facebook, 36% at Twitter, 43% at Instagram, and 576% at TikTok between 2019 and 2020. In 2021, despite the pandemic, mega-platform firms Amazon, Apple, Facebook, Google, and Microsoft saw their aggregate profits rise by 24% and their combined market capitalization nearly doubled to $7.511 trillion, according to The Wall Street Journal.

Technical developments, from the personal computer through to the smartphone, connected billions of people to the Internet, facilitating the rise of the platform business model. Platforms position themselves as the critical go-betweens of a vast array of social and economic activities, leveraging the strength of network effects and of winner-take-most characteristics to grow. As intermediaries, platforms differ from traditional businesses by “reconfiguring the way that transactions are completed, but not necessarily the end product” (Kenney et al., 2021).

Platform power over their ecosystem is reinforced by the terms and conditions that platforms impose and unilaterally change at will. Take, for instance, the Amazon Services Business Solutions Agreement which states that, “[Sellers] grant [Amazon] a royalty-free, non-exclusive, worldwide right and license for the duration of [their] original and derivative intellectual property rights” for Amazon or their affiliates to use any users’ materials. Sellers, pushed to compete on Amazon for access to their massive consumer base are forced to relinquish proprietary information to Amazon, who also acts as a competitor, thereby signing away an important competitive advantage.

As platforms continue to grow increasingly dominant, little research has depicted their pervasiveness and the extent of their power. To address this gap in the literature, in The Platform Economy Matures, we show that platforms have become pervasive across service industries and show that they are amassing power that extends across traditional industrial boundaries. We document the extent of platform presence across industries by recognizing that platforms intermediate transactions, rather than simply selling goods and services. This provides a new way of understanding the spread of platforms and suggests that platforms are present in a far broader range of sectors than previously shown. We estimate that in 70% of service industries, which represent over 5.2 million establishments, platforms serve as intermediaries.

As intermediaries, platforms are in a perfect position to extract value from other businesses operating in their ecosystem and to use this to subsidize expansion into new markets or ventures. Their scale and scope allows them to generate and use data and customer access to further expand their reach, capturing new, adjacent markets with minimal risk. For example, Amazon, with its privileged access to what is being bought and sold on the platform, has visibility into particularly lucrative market segments informing it on when to enter with its own products or when to favor particular firms in search results—an outcome that allows it to destroy businesses that are dependent upon it. This process has been termed the “Amazon Effect.” The enormous mass of data allows it to dramatically decrease the cost and risk of introducing new services, such as launching Amazon Prime or entering logistics and warehousing. Amazon has become all the more powerful as it subsumes ever more segments in the supply chain.

These power dynamics are not only true of the mega-platforms, but also for sectoral platforms. To illustrate, individuals turn to Airbnb to find accommodation but also experiences when traveling. Uber, too, began transporting people and has expanded into food delivery.

Platforms are vital infrastructure, gatekeepers, and ad hoc regulators. This poses critical questions regarding antitrust, entrepreneurship, innovation, and inequality. Is the necessary tradeoff for quick and accessible goods and services the unregulated power for platforms that provide them? Do the benefits of platforms today outweigh the long-term social and economic costs—surveillance capitalism, weakened power of labor and platform-dependent businesses, and more? The growing recognition of the effects of platform power has prompted various measures and proposals by governments around the world with calls echoed in the United States by leading politicians, academics, and civil society groups. Effective regulation will require a “regulatory response predicated upon understanding the mechanisms that platforms use to reorganize industries” rather than simple reactive responses characteristic of traditional competition policy.

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  1. Uttam

    Very nice article really informative

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