5 Questions With David S. Evans And Richard Schmalensee On Matchmaking
30, Nov, 2016
David S. Evans is an economist, business advisor, and entrepreneur, who has done pioneering research into the new economics of multisided platforms. He has also consulted for many of the largest multisided platform businesses in the world and served as an adviser to a number of startup matchmakers. He has cofounded four companies. David also holds academic positions at the University of Chicago Law School and the University College London.
Richard Schmalensee is the Howard W. Johnson Professor of Managementand Economics, Emeritus, at the Massachusetts Institute of Technology. He served as the dean of the MIT Sloan School of Management for nine years and as a Member of the President’s Council of Economic Advisers. Dick is one of the world’s leading scholars on the economics of industrial organization and has done pioneering research on the new economics of multisided platforms. Their new book Matchmakers: The New Economics of Multisided Platforms from Harvard Business Review Press explain how matchmakers work best in practice, why they do what they do, and how entrepreneurs can improve their chances for success. The spoke with The Berlin School of Creative Leadership about the book.
David Slocum: Your new book begins by describing the fundamental differences between conventional single-sided businesses and multisided platforms. Could you please summarize those?
David Evans and Richard Schmalensee: Multisided platforms are mainly about selling one group of customers, like restaurants with spare tables, access to another group of customers, like people who want to go out to eat. And often, as in the case of OpenTable, members of both groups value access to members of the other. Sure, platforms sometimes sell products and services, like regular (single-sided) businesses, but they are mainly about selling “access.” Because of this difference, a lot of traditional business rules don’t hold. For instance, the basic principle that businesses should almost never sell products or services at less than cost doesn’t hold for multisided firms. They often find it most profitable to subsidize one group of customers to participate in the platform so they can make money from charging another group for access to them.
Slocum: While transforming 21st century economies, you consistently emphasize how multisided platforms, in fact, have deep historical roots. How do those origins help us to understand many of today’s most successful businesses?
Evans and Schmalensee: Fundamentally, this helps us understand that the darlings of the 21st century aren’t using a new business model, but are using powerful new technologies to make an old business model work much better and add value in new settings. This, in turn, lets us see that the fundamentals of these new businesses are similar to those of old, familiar ones — from how they price, to how they solve the chicken and egg problem of getting both groups of customers on board. New startups can then learn from old successful ones. For example, the way Uber ignited and rolled out its pioneering ridesharing platform is very similar to how Diners Club ignited and rolled out the first payment card network in the early 1950s. Both started local, built up critical mass in a few geographic markets, and then expanded nationally and eventually globally.