Entering markets serving more diverse customers could prove more promising, as there are multiple possible submarkets to enter (or create), and the power of any dominant player in a submarket will likely be less than that of a dominant player in a homogeneous single market. It’s much easier, for instance, to provide a new, compelling twist on a dating site than to provide a new search engine.
The growth rate of technology-based businesses ensures that platforms will become an increasingly prevalent mode of operating in the marketplace, which raises important questions for your business strategy. Are you competing within a platform marketplace? Consider all the facets of your business. Even if your core business is not platform-based, supporting elements could be. If and where you are engaged in platform markets, could you be “tipped out” by a stronger player? Are you primed to dominate? Is the market homogeneous or heterogeneous? Can you define new segments? How do competitors stack up?
Unless your platform business has a distinct and recognized advantage, long-run success is unlikely. But those firms that provide a superior match between users in the most economically efficient fashion can become the sole dominant player in their industry, enjoying monopoly-like profits with a diminished threat of competitive entry from others.
Reprint No. 00218
- Dylan Minor is an assistant professor of managerial economics and decision sciences at Northwestern University’s Kellogg School of Management.
- This article was published in print as "The High Risk of Platform Markets."