Machine, Platform, Crowd by Andrew McAfee

Author:Andrew McAfee
Language: eng
Format: epub
Publisher: W. W. Norton & Company

The Atom Test: Can Product Makers Tolerate Platform Prices?

Successful platforms are great news for consumers—look at how much consumer surplus there is on top of the revenue rectangle in Figure 8—but they present challenges to incumbent companies dominated by the economics of atoms. For taxis and other cars, the marginal cost of taking someone across town is clearly not zero, or even close, since gas and the driver both must be paid for. For this reason, most companies prefer to operate higher on the demand curve, where prices are greater, even if total demand will be lower.

Two forces push prices downward. The first is consumers, who obviously want to pay as little as possible and thus side with platform builders that seek to rapidly grow their networks. The second is that in most markets, many suppliers compete for business, and many other potential suppliers are waiting in the wings. Platforms usually enhance this competition by reducing barriers to entry, and they often commoditize the suppliers, making them more interchangeable to the consumer. Competition and commoditization, of course, tend to drive down prices, and to deliver the business to the companies willing to supply products most cheaply (while maintaining acceptable quality). In short, platform builders and consumers both want low prices, and competition among suppliers tends to result in them. And there’s often potential for the platform to increase utilization and efficiency, thereby driving down prices even more.

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