As platforms struggle with layoffs and cash burn, here’s a scenario that is quite important for them to fix. You book an appointment with a hairdresser on Urban Company (UC). The hairdresser arrives at your home, does a fine job, and before leaving, hands over contact details, offering a discount in the future if you make direct contact. Take another scenario: An Uber driver offers a small discount if you cancel the ride on the application and pay him directly. Customers can also initiate such deals. This phenomenon is called disintermediation, a fundamental problem for platforms. Why should the customer or seller pay a part of their mutual transaction’s value to the platform? In other words, what prevents a platform’s users from disintermediating its role? We outline some strategies platforms can use to prevent disintermediation and highlight the competition regulator’s role in monitoring anti-competitive behaviour.
The value of a platform: Let’s first understand what value a platform generates for its users. A platform typically reduces three key costs for players: search costs, operational costs, and risk. Search costs reduce due to network effects. Platforms give sellers access to a large pool of buyers, and vice versa. More hairdressers will join UC if there are more customers, and more customers join UC as the depth and width of service providers increase. Every multi-sided platform aims to achieve this virtuous cycle.
The second major cost-head lowered by platforms is operational cost. Urban Company helps the local hairdresser with scheduling, equipment and handling customer complaints. Similarly, Byju’s helps teachers with teaching material, technical support, etc.
Platforms also provide risk mitigation to participants. Ratings and reviews help both sides reduce chances of encountering a bad-quality counterpart. Further, platforms can provide compensation for damages suffered while using their services. Uber often compensates riders if drivers behave poorly, for example.
If the risk-mitigation benefit and reduction in search and operational costs provided by a platform are too weak to hold back a seller operating independently, then the platform faces a greater disintermediation challenge. Therefore, local service platforms like UC face possibly the greatest challenge. The UC hairdresser and you live in the same locality, so there aren’t substantial search-cost savings for the hairdresser on UC. And once you and the hairdresser have one favourable meeting, the risk of disintermediation is high. The collapse of local service platform Homejoy underlines this point. Contrast this to Uber, where a driver benefits greatly from reduced search costs in unfamiliar locations. Similarly, Airbnb significantly reduces hosts’ search costs for guests.
Solutions for disintermediation: Each platform business should understand its value proposition to obtain clarity of vision: what combination of reduction in search cost, operational cost or risk does it offer to its players? We believe that a relatively untapped strategy that platforms can employ is to enhance their risk-mitigation offering. Platforms can design clever incentive schemes for providers by giving them some degree of employment-income insurance, i.e., a fixed-pay component, alongside an incentive to maximize sales. Service providers outside the platform typically face variability in income. Platforms may offer a lower average income but provide greater surety of pay. Risk-averse providers would prefer this certainty and yield margins to the platform for it.
The role of antitrust action: However, even with an optimal platform strategy, the better service providers—who while working independently have low search and operational costs and face low income risks—would not gain from being on the platform. Reputed doctors may not have much use for a medical-services platform like Practo. The best teachers may leave Byju’s. The best hairdressers/plumbers/electricians may leave UC, and so on. Therefore, the service providers that remain on a platform can be of lower quality—a problem known as adverse selection. Indeed, in our primary research, we found that doctors enrolled on the online consultation programme at a medical-services platform (anonymized for this piece) were largely inexperienced (having less than five years of experience) or less qualified (did not have an MD or equivalent). This adverse selection can snowball if customers realize that the service quality on the platform is sub-par.
The prospect of competing with better-quality independent service providers can result in platforms employing anti-competitive strategies to monopolize markets. If platforms have deep venture capital-backed pockets, they can engage in price wars involving below-cost pricing and sustained cash-burn. Independent individual players typically have shallow pockets—how long can they survive predatory pricing? Competition regulators must check such anti-competitive behaviour of platforms. With robust antitrust action, a healthy marketplace is possible where providers who want to avoid risks or search and operational costs partner with platforms, while other providers work on their own and customers get more choice.
Srinath Ramesh and Jagesh Golwala, both IIMA PGP students, are co-authors of this article.
Jeevant Rampal is associate professor of economics at IIM Ahmedabad.
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