The Negative Power of Consumer-Platform Businesses

Google, Meta (Facebook, Instagram) and Amazon are just a few of the technology platform companies that are dominating the businesses they operate in. The core of their business is data and exchange of the same. This has helped to create huge network effects. Given their popularity, this has created a self-propelling cycle, more and more people use these platforms creating even a larger one, thereby generating even more value. This effect has led to dominance.

These businesses have served their customers and users well. But given the consumer’s dependence, perhaps even over-dependence, on these platforms has resulted in certain unwanted implications. Quasi-monopolies have been created which deter new entrants by not giving any leeway and also preventing customers from being weened away.

While users have gathered around these platforms due to the excellent service they receive plus the huge value, this creates a situation where the leader can be the only option. These platforms quickly garnered user adoption in their early days by offering value to them. Their generosity is beginning to resemble their power. They’ve made it easier for buyers and vendors to engage and expand their markets, but they’re also drawing criticism. They have a monopoly on data, which has become a form of currency.

Demanding

Due to the power they hold in terms of consumers and data, platforms are imposing terms and conditions that are rapacious. They are increasingly demanding better commercial terms from the companies in their ecosystem as they grow in might. These terms are skewed to the platforms. To put it simply, this means that the platform must be given the greatest deal available. For example, Amazon will require the best prices a vendor can offer on any online channel. Vendors will increasingly have to face terms like this ecosystem partners as the leaders hold on the market increases. This raises several issues.

To begin with, a platform’s fees can rise as it gains market share. The hold on the consumers and data isn’t threatened by a dominating platform’s ability to do so. But it’s less likely for a newer platform to do so. In these circumstances, vendors have very few options. To compete on another platform, they may want to decrease their pricing even further. Despite this, it is a difficult option that increases the dominant platform’s hold. Depending on the platform, sellers may face additional fees if they are required to pay for access to the market.

This is a common tactic used by the platform. When network effects are modest, they provide cheaper fees and more enticing incentives to draw more vendors into the ecosystem. It becomes more and more likely that the platform will become more dominant and dictate terms as the ecosystem grows around the platform. There is no danger that the network effect would be shattered if the dominant platform goes against its partners’ interests.

Beating Competition

New entrants confront almost enormous difficulties in such a situation. If a new platform opens and seeks to attract partners by providing them better economic terms than the incumbent platform – these could involve decreased selling fees or other incentives like free promotions. These terms, in turn, may push sellers to cut prices on the new platform. In such a circumstance, the dominant platform can once again utilise its dominance and force vendors to offer the same cheaper prices. However, it is under no duty to give merchants the improved economics they enjoy on the new platform. As a result, sellers are hesitant to join the new platform because any price cut on it, on the dominant platform, will translate to lower margins for them. Thus vendors go on with the dominant platform over the upstart platform.

No Alternative

A platform that serves the ecosystem well can attain market dominance but often retains this advantage even if it is working against the ecosystem’s best interests. Contract negotiations are the exclusive means through which this is accomplished. Predatory contracts reinforce the monopoly of dominant platforms as they continue to grow. Consumers may continue to profit from lower pricing even if sellers are feeling the pinch as a result. This is perhaps a not so pleasant angle of such platforms.

The platform that generates network effects by manipulating incentives across the ecosystem loses its goodwill as it gains power. The implications are in a variety of ways. In a recent controversy, it was seen that Amazon used the data available to enter categories/ products, on its own and eventually beaten the vendor partners who had sold the products initially and were successful with it

Companies that feel threatened by the platforms are inclined to fight back by showing proof that the policies and practices of the dominant platforms can create economic harm. The powers to be/ government will have to look beyond retail pricing to ensure a fair & equitable playing field and oversee monopolists avoid any overreaching of their dominance. For both sides of the market to be workable, platforms will need to stay open and transparent.