The platform economy is facilitated by information technology and it has disrupted the traditional economic arrangement (Sundararajan, 2016). This economic revolution has transformed a wide range of human activities, such as social and economic action (Friedman, 2014; Kenney & Zysman, 2016) and it is a much-feted term, as both a concept or a metaphor in the business and management field (Parker et al, 2016; Thomas et al, 2014). To illustrate, Uber uses the platform to interrupt the taxi business by transforming unused seats of private cars into economic commodities, and Facebook restructures social connectivity from face-to-face interaction into online connection. Furthermore, the valuation of platform companies has exceeded the giant oil and automotive corporation (Sentieo, 2014); two tech firms, Apple and Amazon have reached a $1 trillion market cap each. At present, they are the two most valuable companies on Earth (Bhattarai, 2018).
The platform creates an ecosystem to connect organizations, people, and resources and it is also a market place where economic values are created and exchanged (Thomas et al, 2014). A platform company acts as an intermediary by creating an application to connect producers and consumers in the market, and it also forms a two-sided market. The latter makes the platform business attractive to entrepreneurs and investors since the revenues can be generated on each side of the market and/or cross markets (Parker et al, 2016). The platform economy is becoming the mainstream business model and as a consequence affects society at large. This new model generates efficiency in catering price advantage to consumers in comparison to the traditional model, and for instance, Airbnb offers a better price than hotels and inns in supplying rooms to stay and so does GetAround in the rental car business.
Pertaining to the issues above, the next section discusses the concept of the platform economy and its underlying mechanism. Subsequently, the third part analyzes the advantages and disadvantages this new economic model has on the workforce, the industry, and society. In the final section, discussion and suggestions are proposed.
The Platform Economy
The platform economy is the latest innovation of the digital economy and it is solely built on the top layer of the internet milieu. Yet, this model uses network effects and a two-sided market mechanism, which are adopted from the old economy. The combination of a technology-driven apparatus and the enhancement of traditional business mechanisms have brought the platform economy into a higher level of economic efficiency and productivity (Sundararajan, 2016; Parker et al 2015). The former refers to the price advantage and the latter delineates the maximization of underutilized assets. In the following subsections, the paper discusses the concept of the internet ecosystem, network effect, and two-sided market.
The internet ecosystem has enabled the birth of the platform economy, which utilizes the top layer of the digital ecosystem (Fig. 1). This milieu consists of three layers: physical networks, logical layer and platform/application level (Fransman, 2010). The physical network is the backbone of the ecosystem and it is the physical infrastructure wiring computers across the globe. People can get a connection through internet service providers (ISPs) either through fixed cables or wireless accesses.
Moreover, the middle layer is the internet protocol where digital data is transported from one computer to another and was developed under a free system using the TCP / IP model. This logical layer makes the internet work as it does and provides end-to-end data communication, so packet data can flow seamlessly into the system. The top layer is the platform or application level, and this is what average users think as the essence of the internet. Values are created by providing services and content, and tech firms monetize these values into economic commodities, called the platform economy.
The platform economy employs the network effect and the two-sided market strategy simultaneously (Parker et al, 2016; Thomas et al, 2014). In the economic and business literature, a network effect is when the value of services or goods increases along with the exponential growth of users. This effect can be positive or negative. The former is when adding users would benefit the overall network and the value keeps increasing. The latter refers to a condition when new users would saturate the network and create a repercussion effect that reduces its value.
The telephone is a classic example of the network effect: its value increases quadratically as the number of people who utilize it increases (Griffin, n.d.). Adding one user will increase telephone value to each existing user and once a critical mass is achieved, the company becomes valuable and can attract a wider user base. This is when the network effect kicks in.
But the network effect decreases as soon as the system overload; adding more users will clog the overall network and it creates a negative aspect of the network effect. To illustrate: a user may fail in getting a connection or the connection was dropped during the conversation in the peak hours because of the network overload.
Another mechanism underlying the platform economy is the two-sided market (Parker et al, 2016), where a company creates two distinct markets and enables interaction between those two (Fig. 2). Nevertheless, this business model does not exclusively belong to the platform economy, as in the past yellow pages had a two-sided market of consumers and advertisers. The yellow pages had two revenue streams, one from users who bought it and another one from advertisers who purchased a display ad to promote their businesses.
In the digital era, many tech companies adopt a two-sided market strategy and expecting revenues through cross-side network effects. Facebook is the quintessence of the platform economy; because the company creates a two-sided market of a pool of users on one side and advertisers on the other side; and a cross-side network effect simultaneously. Content that is generated by users can attract more people to join the network and this yields a same-side network effect. The cross-side network effect takes place when Facebook sales users to the advertisers. The more users are joining Facebook, the more likely advertiser is going to buy ad space on the platform. Facebook and Google are the two biggest digital advertising providers, and both companies generate 50 cents for every dollar expends on digital ads (Thomasson & Naidu, 2018).
Another good example of scaling up the two-sided market is Airbnb. The company extracts underutilized rooms and turn them into an economic commodity by connecting the hosts and the guests. The company disrupts hotel businesses by offering accommodations with a competitive price. Airbnb generates revenue through charging service fees to the host and the guests for providing information. The creation of a two-sided market benefits the company by cutting the cost structure of building rooms and paying the hotel workers.
Facebook and Airbnb provide a glimpse of success enabled by the upper layer of the internet ecosystem, in which information is their commodity. Information can be varied across platforms, Facebook needs users to generate content, while AirBnB builds a repository of underutilized assets. Afterward, information is monetized in the two-sided market and network effect magnifies their value in the market.
The impact of the platform economy: Advantages and disadvantages
The platform economy disrupts the old economic model and it creates a new arrangement of economic processes across production, distribution, and consumption. This section discusses the positive and negative impact of the platform economy on the workforce, the industry, and society.
Firstly, the market capitalization of the top 15 platform companies is astounding and has reached $2.6 trillion valuations (Daugherty et al, 2016). This value equals the United Kingdom or France’s GDP (World Bank, 2018). More companies are beginning to integrate the platform into their system to propel their capital growth (Daugherty et al, 2016). The platform has turned into a sustainable business model and it creates a new subset within the digital economy, the platform economy.
The second is the platform economy enlarges “gig workers” (independent workers on a short-term basis) and data show 4% of the American population has worked through an online platform at some point (Gayle, 2018). Yet data should be taken with a grain of salt as the work is in “contingent” upon demand or “alternative work arrangements.” For example, a person with a full-time job may work as a Lyft driver to yield additional income in a temporary appointment.
The third is the platform economy enables a company to extract underutilized assets, such as empty seats, and turn them into commodities. Data shows Americans only use up to 20% of the car’s potency (Sundararajan, 2016) and Uber increases car efficiency by maximizing the use of empty seats by selling them to the needy passengers. The company benefits both parties: the car owners who monetize unused seats and the passengers who pay the cheaper price than using taxis. Economic efficiency is achieved by optimizing the use of underused assets.
Lastly, the platform lowers the barrier to enter into the business market in comparison to the previous economic model (Parker et al, 2015). Thus, this attracts young entrepreneurs to instigate a start-up company with small capital investments. In 2007, Airbnb was started in a small apartment with three air mattresses and generated $240 (Carson, 2016). Soon after, the founders realized this was a profitable idea, which led them to promote the company to attract venture capitalists to invest. Long story short, in 2018 the company is worth at least $38 billion (“As A Rare Profitable Unicorn”, 2018). The platform economy enables a tremendous capital growth in a shorter time period than the manufacturing sector; in a comparison, General Motors, a company that has been around for 110 years, is valued at $ 50.4 billion in 2018, meanwhile, AirBnB is worth $ 38 billion in only 10 years (Yahoo Finance, 2018).
The first is the old industry was on the decline and the jobs in the manufacturing and mining sector were disappearing. Not many jobs are available for blue-collar workers since most of them are unskilled or semi-skilled laborers. Working in an Amazon warehouse with low pay and fewer benefits (Godlewski, 2018) or driving Uber as an independent worker with volatile income (Sundararajan 2016) may be their best option. Yet, without a legal contract between the employer and the employee, this condition is abusive to the workers and no laws can protect their rights. The platform economy creates a new class of laborers who is in need of engineering and computer science knowledge, and these new requirements prevent average workers from benefitting in the new economy since most of the blue-collar laborers are not equipped with these kinds of skills.
Secondly, the change from Fordism to the platform model has changed the capital investment and the industry system. Most platform companies adopt a shareholder capitalism model rather than a stakeholder one (Brand & Georgiou, 2016). The latter refers to the Fordism economic model where a company treats all shareholders equally, including the workers, and invested some of its profit to the labor’s welfare by paying a satisfactory salary (Meyerson, 2017). The laborers have the purchasing power to buy company products. Meanwhile, the former emphasizes more on shareholders’ interest, such as investors, venture capitalists and the company’s executives, and abandon the laborers (Brand & Georgiou, 2016). The money mostly funnels back to the owners and shareholders. Therefore, the benefits of economic growth are not distributed equally among the members of society (Melody, 1999).
The third is the platform companies employ a smaller fraction of workers (fig. 3) than the manufacturing corporations (Madrigal, 2017). In the Golden-Age of the automotive industry, General Motors employed more than 500,000 workers, while at the present Facebook hires a mere 31,000 employees (Madrigal, 2017). Another interesting comparison can be made between the Alphabet (the parent company of Google) and Toyota Motors. Toyota is valued at less than one-third of Alphabet, but Toyota Motor hires four times more employees than Alphabet. The proportion between the market value and the number of workers in the platform economy disproportionately advantages the company.
Lastly, the platform economy scales up gig workers (on-demand workers) with a full-time working arrangement that may work better for the younger generation. This young generation is more comfortable with completing a particular task on a flexible schedule (Friedman, 2014). This method gives the company more leverage over the employees to set up low wages, reduced benefits, irregular hours, overwork, and lawsuit prevention (De Stefano, 2016; Wood et al, 2018). The risks are disproportionately taken by the employee than the company and it raises an issue of economic and social injustice.
Discussion and suggestions
The previous section elucidates the advantages and disadvantages of the new economic system in the digital era. The platform economy improves economic efficiency and decreases the cost to obtain services and goods by maximizing underutilized assets in the supply side (e.g. spare rooms, empty seats) (Sundararajan, 2016; Parker et al 2015). Yet, this economic model is detrimental to the workforce in general by eliminating legal contracts between the employer and the employee and the company takes the lion’s share of profit by eliminating the cost of providing social safety nets for the workers (e.g. health insurance, pension, paid vacation) (Wood et al, 2018).
The International Labor Organization (ILO) has instigated an effort to address the issue of misclassification of the employment status in the gig-economy (De Stefano, 2016). Yet, ILO has a restricted power to intervene in local laws and regulations since the power resides in the hand of the local government. A study from Wood et al (2018) in Southeast Asia and Sub-Saharan Africa indicates that this gig-based economy results in low pay, social isolation, working unsocial and irregular hours, overwork, sleep deprivation and exhaustion for workers. In the long term, it will deepen poverty by creating ‘electronic sweatshops’ in developing countries (Wood et al, 2018).
By improving the education system using a STEM-based approach may produce a pool of skillful workers. Thus, this workforce can have more leverage and better bargaining power to challenge the company. Yet, the education sector is a big investment for a country and not every government has the capital needed to build a STEM education system. This will create the same old issue of the rich getting richer, and a country whose government is lacking financial capital would suffer the disadvantage of a platform economy. Rather than closing the disparity of wealth inequality, the platform would widen the gap of poverty.
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