Platform Economics

Digital Labour Organization in the Sharing Economy

Cristiano Codagnone, Athina Karatzogianni, Jacob Matthews

• Publisher: Emerald Publishing Limited
• Year: 2018
• ISBN:
  9781787439856
• Topic: Business
• Subtopic: Corporate Governance
• Index: Business

Platform Economics tackles head on the rhetoric surrounding the so-called "sharing economy", which has muddied public debate and has contributed to a lack of policy and regulatory intervention.The book sheds light on the sharing economy debate by offering an in-depth analysis both of rhetoric employed by sharing economy actors, and by mapping key aspects of digital labour markets. The platform is discussed both as a source of innovation and growth and as a matter of policy concern over competition, tax collection, consumers' protection, privacy, and algorithms transparency, and the future of work.The authors show that actors in the sharing economy have not only used the narratives describing the initial phase of the sharing movement to their advantage, but have also succeeded in enlisting diffuse interests as their allies. The authors' research draws particular attention to the predicted advent of technological unemployment in conjunction with widespread concern over the robotisation of jobs.Advocating an inter-disciplinary approach in which economics, sociology, anthropology, legal studies, and rhetorical analysis converge, this text will prove invaluable to students, researchers and economists alike.

Chapter 1

Platform Economics and the Sharing Economy: A Primer

Introduction

The first question to ask about the ‘sharing economy’, here we use the expression in its widest definition to include also digital labour platforms, is a conceptual one: What is so peculiar about the platforms labelled as ‘sharing’ that sets them apart from other digital platforms that have never been considered as part of the sharing economy? Answering this question would represent the first step towards removing the effects of rhetorical obfuscation.

Current definitions of the sharing economy are mostly ‘ostensive’ (by pointing and exemplification) rather than ‘intensional’ (connotative),¹ which prevent to build a sound typology that (1) have descriptive power and be empirically grounded, (2) reduce complexity and (3) identify similarities and differences. Typologies are organised system of types that can be used for ‘forming and refining concepts, drawing out underlying dimensions, creating categories for classification and measurement, and sorting cases’ (Collier, LaPorte, & Seawright, 2012). Typology mapping ensures greater parsimony and is instrumental for both theory development and policy-making.² Different types, if identified consistently, may have different regulatory and policy implications and some subset can be by analogy assimilated to other already existing and regulated activities.

The first step towards conceptual clarification is to reformulate the above question as follows:

Should/could ‘sharing economy’ platforms be analysed as two-sided and multi-sided markets? Or do they present features that set them apart from others (digital or analogic) commonly studied as two-side markets or multi-sided platforms (MSPs)?

If sharing platforms could unequivocally be defined as two-sided markets, this would warrant the application of both established analytical and theoretical approaches, and the corresponding policy ‘tool box’. As we shall see, whether or not a particular activity qualifies as a two-sided market has relevant implications with respect, for instance, to competition policy (Evans, 2003a; Evans & Noel, 2005; Evans & Schmalensee, 2007; Wright, 2004). The first indirect answer could be garnered by looking at those contributions from the literature on two- and multi-sided markets where some of the most well-known ‘sharing’ platforms (i.e. Uber, Airbnb, oDesk today Upwork and TaskRabbit) are studied or at least cited as examples (Cullen & Farronato, 2015; Farronato & Fradkin, 2015; Fradkin, 2014; Fradkin, Grewal, Holtz, & Pearson, 2015; Hagiu & Wright, 2013, 2015a, 2015b, 2015c; Horton, 2014; Horton & Golden, 2015). Within this literature, the expression ‘sharing economy’ is rarely used and platforms are studied simply as peer-to-peer (P2P) two-sided markets for the exchange of underutilised goods and services. The only special characterisation compared to other instances of two-sided markets concern the P2P dimension.

This indirect answer, however, is not sufficient to answer the above question. In this chapter, we first provide a primer on the two-sided market literature based on a selective review of key contributions; then in the end we come back to consider the extent to which at least some of the sharing platforms qualify as two-sided markets and their implications.

In Search of Two- and Multi-sidedness

Two-sided or multi-sided markets or platforms are situations where a platform enables two or more groups of users to transact or at least interact in ways that at least one group and usually all groups benefit directly or indirectly from having a growing number of users on the other side(s). As not to repeat multiple expressions all the times, henceforth we simply use the acronym 2SMs (two-sided markets) to generically refer to this type of economic operator (including if they are multi-sided or, if technically, they should be called platforms rather than markets). Hence, 2SMs internalise for the matched sides the network externalities and reduce transaction costs. Network externality means that the value of a 2SM and the number of transactions increase more than proportionally with the number of participants. The higher the number of participants already on the market, the more others will want to join because it increases consumer choice and boosts the pool of customers for service suppliers. This may trigger competition policy questions, although scaling up to dominance (size) and industry concentration are constrained by several factors (see infra).

The relevance of the 2SM literature has to do with competition policy implications that have been addressed by several authors (e.g. Evans, 2003a; Evans & Noel, 2005; Evans & Schmalensee, 2007; Wright, 2004); many traditional axioms of economic analysis that inspire competition policy do not hold and should not be used when markets are two-sided. For instance, pricing to one side below marginal cost is not a predatory behaviour but rather a common profit-maximising strategy in 2SMs. Defining the relevant market for antitrust purposes and looking at only one side can lead to a market definition that is too narrow. Furthermore, network effects can lead to tip towards a single dominant platform (Rysman, 2009). As reviewed in Li (2015, p. 100 and pp. 103–105), the two-sided perspective has been used by European Commission (EC) and the European Union (EU) courts, that is, the General Court (GC) and the European Court of Justice (ECJ), when applying the EU competition law. Hence, the question of which markets are two-sided has become increasingly relevant (Filistrucchi, Geradin, & Van Damme, 2013, p. 36).

Since 2002, a growing body of economic literature has analysed situations that broadly qualify as 2SMs, although as we shall see, there is no consensus regarding the conditions for two-sidedness (or multi-sidedness), which remains an empirical matter to be ascertained case by case (Filistrucchi, Geradin, van Damme, & Affeldt, 2014; Filistrucchi et al., 2013). The first to look at firms serving two different types of customers and facing the ‘chicken and egg problem’ were Gawer and Cusumano (2002) and Caillaud and Julien (2003b). These authors referred to ‘intermediary markets’ serving two distinct groups of customers. The expression ‘two-sided market’ was first introduced by Rochet and Tirole (2003, 2006) and was used later by Wright (2004) and Armstrong (2006). In parallel, Evans (2003a, 2003b) used the expression ‘two-sided platforms’ and was one of the first to systematically apply this perspective to what he called the web economy (Evans, 2008a, 2008b, 2009, 2011). On the other hand, Parker and Van Alstyne (2000, 2005) were converging on ‘two-sidedness’ coming from network and information theory, and with Eisenmann, Parker, and Van Alstyne (2006) were the first to talk about ‘two-sided strategies’ rather than ‘markets’. Rysman (2009) also used the expression ‘two-sided strategies’ to convey the idea that there are choices made by agents rather than an imposed endogenous industry structure. Hagiu and Wright also look at multi-sided platforms as a matter of firms’ strategic choices. Building on the theory of the firm, they frame these choices as a trade-off between ‘being a MSP or a vertical integrated firm’ (Hagiu & Wright, 2015c), or between ‘controlling versus enabling’ (Hagiu & Wright, 2015a). Initially, the focus of this literature was made up of payment systems, auctions, operating systems and media markets. Lately, however, it has been increasingly applied to digital platforms. In particular, digital platforms are discussed in the most recent works by Hagiu and Wright (2013, 2015a, 2015b, 2015c). Some digital platforms are also the object of controversy over whether or not they can be considered two-sided (Li, 2015; Luchetta, 2014).

As stated, there are different approaches to identify the conditions of two-sidedness, which can be ascertained only empirically by considering specific cases. Following the analysis presented by Li (2015), three approaches are identified regarding how two or more groups of users interact: (1) two groups of customers exert bilateral indirect network externalities; (2) only one group of customer exerts unilateral indirect network externalities on the other; and (3) the existence of indirect network externalities is not necessary. Below, these are discussed briefly together with the more specific perspective of Hagiu and Wright (2015c) on the difference between 2SMs, resellers and vertically integrated (VI) firms.

Two-way indirect network effects. In Roche and Tirole’s (2003) original contribution and in the early analysis of intermediary markets by Caillaud and Jullien (2003a), indirect network effects on both sides are fundamental, and the role of the platform (intermediary) is to internalise the externalities produced by the fact that the decision of each set of agents affects the outcomes of the other set of agents (Rysman, 2009). In addition, Roche and Tirole (2003) require that (a) the two sides cannot coordinate and become a unified interest and (b) the amount charged by the platform on one side of customer cannot pass through to another side of customers.³

One-way indirect network effects. Armstrong (2006), Evans (2003b), Evans and Schmalensee (2007), and more recently Filistrucchi et al. (2013), have relaxed the above definition and basically consider sufficient that network effects exist for at least one group of customers. Armstrong is possibly the first to include both ‘membership’ (access) and ‘transaction’ (usage) types, whereas originally Roche and Tirole (2003) considered only transaction fees. According to Evans (2003b), the conditions for a two-sided platform are that (a) there are distinct groups of customers, (b) a member of one group benefits from having demand coordinated with one or more members of another group and (c) an intermediary can facilitate that coordination more efficiently than bilateral relationships between the members of the group. Evans and Schmalensee (2007) later add that for condition (b) above it is sufficient that one side of customers is attracted with the increasing size of the other. Filistrucchi et al. (2013) confirm and subscribe to this view and when discussing media platforms, while recognising that viewers generally do not like TV advertising, conclude that ‘it is not necessary for the existence of a two-sided market that two indirect network effects be present. One suffices’ (Filistrucchi et al., 2013, p. 38). They characterise, for instance, the TV market as a 2SM with one positive and one negative indirect network effect.

No need for indirect network effects. In their second contribution, Rochet and Tirole (2006, p. 657) considered what they termed the ‘cross-group externalities definition’ as ‘under-inclusive’ and proposed this definition where the key and only characterising element is apparently that the price structure is non-neutral:

A market is two-sided (a two-sided platform exists) if the platform can affect the volume of transactions by charging more to one side of the market and reducing the price paid by the other side by an equal amount; in other words, the price structure matters, and platforms must design it so as to bring both sides on board (pp. 664–665).

Therefore, it is only the price structure that matters, since indirect network externality, as a necessary condition, would make 2SMs under-inclusive. Yet, it must be observed that Evans and Schmalensee (2007) argue that for such a definition to be satisfied, the relationship between end users must be fraught with residual externalities, whereas according to Filistrucchi et al. (2013, note 7; 2014, p. 299), the definition proposed by Roche and Tirole is only apparently different from that provided by Evans and in practice is just broader.

2SM versus resellers versus vertical firms. In their approach to 2SMs and multi-sided platforms, Hagiu and Wright (2013; 2015a; 2015b, 2015c) contrast these to vertical integrated firms or resellers alongside the dimension of the amount of control exerted by the different players. These authors do not consider network effects as necessary and identify as the key features of two-sidedness and multi-sidedness because (i) they enable direct interactions between two or more distinct sides, and (ii) each side is affiliated with the market/platform. Direct interaction entails that sides maintain control over key terms of the interaction (pricing, bundling, delivery, marketing, quality of the goods or services offered, terms and conditions) as opposed to a situation where the intermediary takes control over such terms. Affiliation means that at each side the users make the investments needed to join the market/platform and interact with the other sides; such affiliation is needed to create cross-group network effects. Following this perspective, 2SMs are distinguished from resellers and VI firms, building on the theory of the firm and considering issues such as moral hazard and the trade-off between control and decentralisation (Fig. 2).

Only when the two sides interact directly by way of their affiliation with the intermediary (market or platform), then we can talk of two- or multi-sided markets. When the intermediary buys from suppliers and sells to buyers, then direct interaction (and related control on, for instance, price) disappears and we face the condition of reseller. The interaction is direct to the extent that the sides retain residual control rights over the goods traded. This typically arises when the supplier retains ownership of the goods being traded: examples include eBay and shopping malls. In contrast, a pure reseller holds all residual control rights over the goods sold to the buyer. This typically arises when the re-seller takes ownership of the goods from the suppliers; old-fashioned retailers are typical examples. When an operator integrates and controls the provision of the services by professionals or workers, becoming directly responsible for them, then it is a VI firm (whereas in 2SMs the independent professional or worker retains responsibility for and residual control rights over the services). The fundamental trade-off in this strategic choice is between the coordination and control benefits that arise in a VI model (entailing also additional costs), and the benefits of lower costs from a two- or multi-sided strategy (at the cost of less control and of efforts needed to motivate professionals to adapt their decisions to the information that arises from the market/platform). In the VI mode there is a possibility of ‘moral hazard’ in that professionals may produce more efforts than needed; on the other hand, in the 2SMs mode there can be information-related moral hazard by online platforms that can extract insights from the aggregate data generated by the interactions between contractors and customers on their sites – insights that are not known to any individual contractor. It is worth noting that the way in which Hagiu and Wright (2015c) define direct interaction exclude some key sharing economy platforms and make them more similar to resellers or VI firms. In Uber and some digi...