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Successful platforms? Matchmakers that reduce frictions.

MIT Sloan’s Richard Schmalensee on what OpenTable has that Apple Pay doesn’t

By Brian Eastwood  |  June 8, 2016

The business world is in the midst of a platform revolution, with billion-dollar companies springing up almost overnight to disrupt industries as varied as hospitality, transportation, and retail.

Richard SchmalenseeRichard Schmalensee

Companies such as Airbnb, Uber, and Amazon haven’t succeeded solely by connecting large numbers of people, organizations, and resources, as the theory of network effects might suggest.

Instead, Richard Schmalensee and David S. Evans argue in Matchmakers: The New Economics of Multisided Platforms, these ecosystems succeed by reducing important frictions that make it difficult for people and organizations to connect with each other in a mutually beneficial manner.

A “chicken-and-egg problem”
Multisided platforms have proliferated in recent years thanks to modern technological advances—namely broadband internet, mobile phones, and the cloud. However, the concept of the matchmaker is nothing new, said Schmalensee, professor of management and economics emeritus and dean emeritus at MIT Sloan.

The medieval trade fair or ancient Greek agora had to strike a delicate balance: Charging the right rent to the right sellers to attract the right buyers so a long journey to market is worthwhile to both groups.

“You solve the chicken-and-egg problem by finding some reason for both sides to come,” he said. “Once both sides come, you can be self-sustaining and profitable. But you have to get it going.”

Matchmakers

For the most successful platforms, the reason to come is reduced friction. OpenTable lets diners peruse open reservations at dozens of restaurants instead of calling them one at a time. Alibaba connects retail and wholesale buyers and sellers in several authenticated platforms. M-PESA lets Kenyans send and receive money using their mobile phones without needing a bank branch, debit card, or ATM.

Friction matters more than technology, Schmalensee said. Apple Pay is a “neat idea,” but it doesn’t bring enough value to buyers or sellers to displace the credit card at the point of sale. A full year after its September 2014 launch, Apple Pay accounted for only 0.18 percent of all retail store credit card transactions.

Meanwhile, Business-to-Business platforms failed by the thousands in the United States because the buyer-seller trust and communication issues that e-commerce platform Alibaba resolves in China are largely absent here.

“It’s not finding some clever technology connecting A types and B types more easily,” Schmalensee said. “You have to make the connection more valuable, something you can get paid for enabling.”

“The only limit is human ingenuity”
Multisided platforms succeed when they have rules to benefit all comers. Both OpenTable and Facebook suspend user accounts—the former for too many dinner reservation no-shows, the latter for bad behavior. Doing so makes these platforms more attractive to restaurants and advertisers, who are assured that users are reliable and trustworthy.

“In many of these settings, these rules are obvious, but it requires some thought,” Schmalensee said. “That’s not a problem that arises in ordinary businesses: They don’t need to set limits on interactions among their customers.”

It’s difficult to predict which types of matchmaking businesses will emerge in the platform economy of the future, Schmalensee said, but he added that innovation will likely come in episodes. Electric streetcars were becoming common in the 1890s, he noted, but it would be another three decades before electric motors became common in factories.

“People will have ideas that come in waves,” Schmalensee said. “People will be doing things in five years that we haven’t even imagined today. The only limit is human ingenuity.”