B-Platform Mediated Business Models

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Questions and Answers

What pricing strategy is suggested for a platform targeting price-sensitive users?

Subsidize the price-sensitive side and charge the higher-valued side. (correct)

Offer equal pricing for all users regardless of sensitivity.

Subsidize only the high-quality side and charge the other side.

Charge high prices to most users to maximize revenue.

Which factor is important to consider when setting platform pricing according to output costs?

The willingness to pay needs to be enhanced through marketing.

Price sensitivity should be ignored in favor of brand loyalty.

The costs associated with providing services to the subsidy side must be substantial. (correct)

Pricing should only focus on the revenue side without considering costs.

What challenge is posed by strong same-side network effects on a platform?

They can create negative impacts that warrant limiting user numbers. (correct)

They are irrelevant to pricing strategies.

They enhance the overall brand value of the platform.

They encourage more users to join the platform.

What is a strategy for handling users' brand value in a platform ecosystem?

Capitalize on marquee users to attract others on the network. Signup and view all the answers

What should platforms consider when deciding whether to share or maintain control?

The decision must weigh the advantages of user control against market accessibility. Signup and view all the answers

What is a defining characteristic of two-sided markets?

Costs and revenues are present on both sides. Signup and view all the answers

Which of the following best explains the winner-take-all phenomenon in platforms?

Leaders can leverage high margins to outcompete rivals. Signup and view all the answers

How do network effects impact the value of platforms?

They increase the value to users as the network grows. Signup and view all the answers

What factors have contributed to the prevalence of platforms in the digital age?

Lower search costs and lower reproduction costs. Signup and view all the answers

In traditional businesses, what tends to happen after a certain level of growth?

Returns stabilize and experience diminishing returns. Signup and view all the answers

Why might users be willing to pay more for access to a larger platform network?

Larger networks often guarantee more reliable offerings. Signup and view all the answers

Which of the following is NOT an example of a two-sided market?

Local grocery stores Signup and view all the answers

What is a primary benefit of digital platforms over traditional ones?

They facilitate efficient matching between users on both sides. Signup and view all the answers

What characterizes a two-sided network effect?

The value of a product/service increases with more customers on both sides. Signup and view all the answers

Which of the following is NOT a component of a platform provider?

User authentication Signup and view all the answers

In the context of network effects, what is an example of positive cross-sided network effects?

More rental properties lead to higher guest interest. Signup and view all the answers

What is a defining characteristic of same-sided network effects?

Value decreases as more users join the same group. Signup and view all the answers

How do platforms like Airbnb benefit from two-sided network effects?

By increasing the number of both hosts and guests to enhance platform value. Signup and view all the answers

What is the main benefit of network effects for a platform?

They increase the platform's market value and competitive advantage. Signup and view all the answers

Which of the following best describes a one-sided network effect?

Value is derived from the interaction between users on one side only. Signup and view all the answers

Which statement is true regarding network effects in platforms?

Network effects can lead to significant market monopolies. Signup and view all the answers

What is a primary strategy used for pricing within a 2-sided platform?

Utilizing a premium charge on the money side while subsidizing the other side Signup and view all the answers

Which of the following best describes the term 'subsidy side' in platform pricing?

A group that, when attracted in volume, increases the value for the revenue side Signup and view all the answers

What factor significantly affects pricing decisions in platform management?

The impact of the other side’s willingness to pay Signup and view all the answers

What is the purpose of introductory pricing in a platform strategy?

To attract a large number of new customers and suppliers Signup and view all the answers

Which dynamic must managers consider to prevent platforms from failing?

Navigating the winner-take-all (WTA) dynamics Signup and view all the answers

What can impact the cross-sided network effects in a platform?

The size of the subsidy side of the platform Signup and view all the answers

What typically occurs once network effects are established in a platform?

The platform can increase prices to recover initial investments Signup and view all the answers

What does the threat of envelopment signify for platform managers?

Potential competition from platforms that integrate their features Signup and view all the answers

What is a primary condition for a platform to achieve a winner-takes-all (WTA) status?

High multi-homing costs for consumers Signup and view all the answers

What was a significant factor influencing the DVD industry's market strategies?

Minimal technical differentiation opportunities Signup and view all the answers

Which of the following could be considered a prerequisite for gaining proprietary control in a market?

Existing relationships with prospective users Signup and view all the answers

How can platforms effectively respond to the threat of envelopment?

Change their business model Signup and view all the answers

Which statement best describes the impact of convergence on market boundaries?

It creates envelopment opportunities by merging functionalities. Signup and view all the answers

What was one of Real’s strategies to combat the competitive threats posed by Microsoft?

Leveraging existing consumer relations to launch streaming services Signup and view all the answers

Which of the following describes a common risk associated with the threat of envelopment?

Rivals can bundle functionalities at potentially lower costs. Signup and view all the answers

What component is least important for achieving success as a first mover in a market?

Ensuring minimal market competition Signup and view all the answers

Study Notes

Platform Mediated Business Models

Platform models connect two or more distinct user groups within a network
Examples include credit cards, newspapers, HMOs, and operating systems
Traditional value chains have costs on the left side and revenue on the right side
Two-sided markets have costs and revenue on both sides due to their dual user structure

Two-Sided Markets/Platforms

Network effects increase platform value with more users on the other side (e.g., Airbnb, Uber)
Platforms benefit from increasing returns to scale as user bases grow
Traditional businesses experience diminishing returns beyond a certain growth point
Platforms with high margins can invest heavily in R&D and lower prices for market dominance
Examples in this area include credit cards and operating systems

Two-Sided Markets

Platforms serving two sides are not new (e.g., malls, newspapers, and electricity markets)
Digital technologies have increased platform prevalence due to two key factors:
Lower search and tracking costs improve matching efficiency between sides (e.g. Google, Apple, Airbnb, Uber)
Lower reproduction and verification costs of digital technologies boost trade effectiveness (e.g., software platforms, SDKs)
Cost savings in these areas allow faster and cheaper delivery to customers

Why is Airbnb so Popular?

Airbnb's guest nights booked have increased dramatically (from millions to tens of millions)
Bookings in a day, weeks, minutes, seconds are on the order of those numbers as well
This shows exponential growth and rapid increase in popularity

Airbnb Growth

Airbnb demonstrates solid growth attracting investor interest
2015 estimated revenue: $1 billion; and estimated nights booked: 78 million in 2015
2015 projected revenue: $900 million
Data shows the company is a growing entity in the market

Marriott Versus Airbnb

Marriott, a decades-old company, has 697,000 rooms in 80 countries.
Airbnb, a newer company, has 650,000 rooms in 192 countries.
Marriott intends to add more rooms within 2 weeks
Data suggests significant growth and evolution from both companies

IT Enabled Asset-less Giants

Companies like Uber, Facebook (Meta), Alibaba, and Airbnb are examples of asset-light ventures leveraging IT
Uber, the world's largest taxi company, does not own vehicles
Facebook, a media giant, does not create content
Alibaba, the most valuable retailer, doesn't have inventory
Airbnb, the world's largest accommodation provider, has no real estate

IT Enabled Asset-less Giants (Data)

This section presents key data on various companies including year, employees, market capitalization and firm
Ex: Uber in 2009 had 5,000 employees with a market cap of $60B
Ex: Airbnb in 2008 had 3,000 employees with a market cap of $21B

IT Enabled Two-Sided Platform Examples

Illustrative images showing Airbnb and Uber logos.

Anatomy of Platforms

User groups interact through the platform
The platform provider supplies products, services, and infrastructure for users' interactions
Rules, protocols, rights, and pricing govern user interactions

One-Sided Network Effects

Product/service value increases with more customers
Example: Telephone services

Two-Sided Network Effects

Product/service value rises with more customers and suppliers on each side
Airbnb example: value to guests increases with more rental listings; value to hosts increases with more potential guests

Network Effects in Platforms

Same-sided network effects: one side increases in value with more users
Cross-sided network effects: one side's value increases with the other
Examples of these effects include Airbnb and TV viewers.

Uber's Growth: Cross-Sided Network Effects

The projected global bookings of Uber increased 141% between 2015 and 2016
Uber's global bookings revenue rose from $0.69 billion to $10.84 billion over the period

Uber's Growth (By David Sack)

Faster pickups, lower prices, less driver downtime, and more geographic coverage contribute to Uber's growth
Increasing demand and driver base lead to more geographical coverage & saturation.

Key Decisions in Managing Platforms

Managing platform pricing
Managing the Winner-Take-All (WTA) Dynamics
Understanding and mitigating threats of platform envelopment.

Platform Pricing

traditional pricing (marginal cost, consumer willingness to pay)
two-sided pricing: price each side based on impact on the other and growth potential
"subsidy side," high volume and valued by others
Charge premium from revenue side and less from subsidy side for cross-sided network outcomes

Subsidy/Revenue Side of Platform (Examples)

Illustrates examples of platforms that adopt a subsidy model (e.g., homebuyers/sellers, passengers/drivers, employers/employees)

Platform Pricing (Further details)

Money side willingness to pay a premium for larger numbers in a subsidy side; numbers in the monetized side are attractive to the subsidy side.
Large numbers in one side can make the other unattractive (or appear more attractive to users) in terms of platform usability.

Pricing Strategy to Build Network

Introductory pricing to attract customers/suppliers and then increase for investment recovery
Successful network size creates customer/supplier willingness to continue even at higher prices

Factors Determining Platform Pricing

Ability to capture cross-sided network effects (e.g., leveraging rival platform functionality)
User sensitivity to price and quality influencing the platform business model.

Factors Determining Platform Pricing (deeper context)

Subsidizing one side of the platform with the money side of the platform affecting a platform's pricing strategy
User sensitivity to quality of a platform

Factors Determining Platform Pricing (deeper context cont.)

How well a product/service is subsidizing one side of a platform can affect the prices and the pricing strategy
User sensitivity to what is being offered on the platform may have repercussions on platform pricing
Understanding output costs can be a critical part of platform pricing, and it influences the types of users participating in the platform

Output Costs

Output costs arising from providing products/services to the subsidy side are crucial
Platform pricing includes whether customers are willing to pay for these products/services

Same-Side Network Effects

If users increase negatively in quantity, it can affect platform decision-making

User's Brand Value

User brand value (e.g., marquee users in shopping malls influencing user choices affecting pricing)

Managing WTA Dynamics

Two-step process to decide to partner or fight for control over a platform:
Decide platform service/products
Whether to battle each other or to operate as part of a whole

Managing WTA Dynamics (Examples)

Example of DVD industry showing how participants pooled resources for a shared market, boosting total market size and reducing marketing costs

Managing WTA Dynamics (Prerequisites)

Minimum requisite for proprietary control: cost/differentiation advantages
Pre-existing relationships with users (e.g., Adobe PDF)
Prior successful products (e.g., Microsoft)
Deep pockets matter
First-mover advantage (e.g., Google with web search)

The Threat of Envelopment

Rival platforms, offering more functionality or services, may draw away platform users.
Convergence and blurred market boundaries in technologically complex offerings.

How to Face Threat of Envelopment

Change platform business model to counter rival platform competition
Forming strategic partnerships with other significant entities that provide user bases
Utilize lawsuits and anti-trust laws for competition reasons.

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Description

Explore the concept of platform mediated business models that connect distinct user groups, such as credit cards and operating systems. This quiz highlights the dynamics of two-sided markets and the effects of network growth on platform value. Assess your understanding of traditional versus platform business models and their implications for market strategies.