Harvard Business Review Press Author Richard Schmalensee Talks about Matchmaker Businesses
Harvard Business Review Press author Richard Schmalensee is an economics thought leader. 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. We spoke to Richard about his recent book, Matchmakers: The New Economics of Multisided Platforms.
How did you and your co-author, David S. Evans come to write/develop this book?
Beginning in the mid-1990s, David and I worked together on payment systems and then on computer operating systems, and we wrote a book on each. Then, around 2000, Patrick Rey and Jean Tirole circulated an important paper, mentioned in Tirole’s Nobel Prize citation, showing that both payment systems and operating systems were examples of multi-sided platforms and that other examples were all around us. Being very familiar with two important examples, David and I then wrote several academic papers on this business model and began advising a number of firms that were using the platform model. We decided to write Matchmakers to use our experience with real businesses to illustrate some fundamental economic principles that anyone considering starting, investing in, or working for a multi-sided platform needed to understand.
Your book focuses on the challenges of starting a matchmaker businesses. What are some of the core-principles of a successful matchmaker?
A successful matchmaker must significantly reduce an important friction, or transactions cost, that makes it difficult for members of two or more groups to create value by interacting, and it must solve the critical mass problem. On the first principle, think about taxi companies as matchmakers: they bring drivers and passengers together. But they do so inefficiently; it can take a long time for a driver to find a passenger or for a potential passenger to get a cab. Uber found a way to reduce significantly the time required to make a driver-passenger match, and it is taking substantial business away from taxi companies. On the second principle, Uber works for drivers because there are plenty of potential passengers, and it works for passengers because there are usually plenty of cars available. Once there are enough of both in any city, Uber’s matchmaker model is viable. But not until then. Matchmakers are selling access; without sufficient participation, access is not valuable.
Do you have a favorite matchmaker business or a favorite story of success/failure of a matchmaker business?
I like the story of OpenTable that we tell in the first chapter of Matchmakers. OpenTable identified an important friction: the consumer’s difficulty of making restaurant reservations over the telephone and the cost to restaurants of answering the telephone and tracking reservations with pencil and paper. Others also saw this friction and saw the potential of using technology to reduce it. But, as far as I know, OpenTable is the only one that has survived and prospered, and it even nearly died an early death. It burned a lot of cash until it figured out how to solve its critical mass problem. I also like OpenTable because it illustrates a common feature of multi-sided platforms: asymmetric pricing. OpenTable doesn’t charge me anything for the valuable service it provides, just like Google doesn’t charge me for search. OpenTable even gives me rewards for using its service, so it is really charging a negative price. This sort of pricing would make no sense in a conventional business, but matchmakers commonly sell below cost or even offer negative prices to one of the groups they serve.
What lessons can established (non-matchmakers) businesses learn from matchmakers?
Traditional businesses should understand the matchmaker business model for both defensive and offensive reasons. Since advances in communication and computation, particularly the rise of smartphones, have made it easier to bring people and businesses together, the potential for matchmaker businesses has greatly increased. Thus conventional businesses are likely to face increasing threats from matchmakers that they need to understand. Online malls like Amazon Marketplace, for instance, are disrupting conventional brick-and-mortar retailing, and some retailers are working hard to use technology to respond. On the offensive side, many businesses are asking themselves whether they should become platforms and take advantage of the power of the matchmaker business model, turbocharged by new technology. This route is not for everyone, though, despite the buzz around multi-sided platforms and the technology that new ones exploit. Zappos, for instance, began as an online mall, linking shoe vendors with consumers, but it decided to become a conventional (online) retailer, buying and reselling shoes, in order to provide a uniformly high level of customer service.
Full Content: EBSCO