Rethinking intra-platform governance
A takeaway delivery man waits to pick up the order in front of a lemon tea shop in Xiamen, Fujian. Photo: CFP
With the rapid development of information technology in the 21st century, digital platforms have become integral to the infrastructure of society and the economy. With digital technology, digital platform companies connect to and serve multiple users. As industries digitize, these digital platforms not only serve as trading platforms, such as operating systems, application shops, and online communities, but also penetrate many industries, including accommodation, tourism, entertainment, office work, local services, healthcare, education, and training.
Extant research focuses on governance over competition between different enterprises and platforms, neglecting governance issues within platforms.
Three relationships
Due to network effects, platform markets are often characterized by winner-takes-all approaches, and the issue of intra-platform governance is prominent. Because platform markets are characterized by transcending regional or even national boundaries, platforms that survive in the market generally have a massive scale of multilateral users, meaning that intra-platform governance should focus on the following three pairs of relationships.
Platform owners must pay attention to the relationship between intra-platform operators and consumers. In the platform market, the relationship between intra-platform operators and consumers differs from that of traditional markets in terms of the location where transactions take place—transactions between operators and consumers take place in cyberspace. The authenticity of information offered by platforms dictates the efficiency and effect of consumer searches, as well as the effectiveness of the platform market. The value of a platform lies in eradicating inconsistent information, thereby reducing transaction costs with the help of authentic and transparent information.
False information fabricated by operators within the platform, is a form of unfair competition which harms consumer interests, undermines fair competition in the platform market, and undermines value co-creation in the platform ecosystem. In reality, some platforms may not regulate this behavior out of their own short-term interests, which to a certain extent, condones this type of corruption. This ultimately hurts consumers’ trust in the platform and undermines the platform’s long-term interests.
Platforms need to focus on governance of relationships among operators. In digital platform markets, the relationships among operators on the platform are more closely coupled than in traditional markets. Rules created by digital technology administrators and platforms have led to this high degree of coupling. Digital technology makes products and operations within the platform more transparent and reduces imitation costs. The platform rules also lead to greater alignment of behavior within the platform. This high degree of coupling decreases differentiation, and homogeneous competition means an increase in competition intensity.
In a fiercely competitive platform market environment, operators may achieve competitive advantages through integrity and innovation, but may also engage in violations, such as infringement of intellectual property rights and malicious complaints against competitors in the same industry. Platforms are both the creators and regulators of the platform market, and have the incentive and ability to maintain fair competition in the platform market.
In terms of motivation, if platforms fail to create a fair and equitable marketplace, then honest and trustworthy operators within the platform will choose to vote with their feet. Once a platform is branded as a space where bad money drives out good, then there will also be a consumer exodus. This vicious circle will lead to the platform’s rapid collapse.
In terms of capacity, administrators or judicial authorities have limited enforcement resources and are objectively unable to identify and deal with violations in a timely and effective manner due to the vast number of transactions handled by platforms. Platform owners have the algorithms and data resources (such as abnormal traffic) to instantly detect, and occasionally anticipate, possible violations of the law by platform operators, to effectively curb illegal behaviors within the platform. At the same time, legally speaking, platforms have the responsibility to detect unfair competition and punish it according to pre-defined and published platform rules.
Platforms need to manage relationships between operators on the platform and platform administrators themselves. The relationship between platforms and operators within the platform has become complex and is mutually reinforcing. The large number of heterogeneous in-platform operators is the lifeblood of platforms, and this is the main value creator in the platform ecosystem.
At the same time, there is a potential conflict between in-platform operators and platforms in terms of capturing value. The relationship between platforms and in-platform operators depends, to a large extent, on the platform’s development stage. Platforms require different types of in-platform operators during different stages of development. Platforms adapt their rules to their stage of development, and in-platform operators must also adapt to these rules.
When the platform market is in its growth phase, the conflict is less pronounced and the platforms need participation from a vast number of in-platform operators in order to develop the platform marketplace within a competitive platform ecosystem. At this stage, the two have more of a symbiotic relationship. As the platform market matures, the conflict between the two will become more pronounced. Platforms will levy heavier “platform taxes” to squeeze the interests of operators within the platform. Platforms will increase revenue through fierce competition in the platform market, by entering the platform market with higher profit margins, or by acquiring high-margin platform operators. Intra-platform operators must develop a process for monitoring platforms in order to avoid manipulation, such as multi-homing, building their own platforms, developing offline channels, and so forth.
Constraint from law
Platforms lead the development of governance rules, including the allocation of decision-making power, the distribution of benefits in the platform ecosystem, and the resolution of disputes within the platform ecosystem. Most of the time, platforms dominate platform governance. However, the platform economy’s healthy development also requires that platform-led governance recognizes the following triple constraints.
The first constraint originates from laws and regulations. Although platforms lead governance within the platform, this governance should comply with laws and regulations. There are several main scenarios where platform owners violate laws and regulations. To begin with, platform actions may be detrimental to consumer interests. In order to achieve rapid platform development, platforms may relax or even circumvent regulation within the platform, which may result in compromised consumer interests. For example, the hitch carpooling service of Didi [a ride-hailing provider in China] was suspended mainly due to consumer safety concerns.
In addition, platform actions may be detrimental to the interests of operators within the platform. Platform owners and in-platform operators cooperate in value co-creation on the one hand and have potential conflicts in value capture on the other. Besides, the actions of the platform owners may harm the interests of third parties outside the platform. Exclusivity agreements between a platform and its intra-platform operators will harm the interests of third-party platforms. Data licensing or privacy agreements with consumers may also harm the interests of related parties.
Constraint from competition
The second constraint should be the development of checks and balances in competing platform ecosystems. Although the platform market is characterized by “winner takes all”, platforms’ market position is not unbreakable. Due to the ambiguous and dynamic nature of the platform market, incumbent platforms must pay attention to checks and balances in the competitive platform ecosystem. Traditional enterprises generally find their market positions based on the industry and enter relevant markets with the help of supply-side capabilities. Unlike traditional enterprises, platform enterprises have a huge number of demand-side users and possess big data on user characteristics and behavior. They can enter markets through platform envelopment or product bundling. Platform companies, therefore, rely more on demand-side capabilities to enter relevant markets, which explains why platforms like Meituan are involved in a number of businesses such as takeout delivery, movies, travel, and hotel booking, all at the same time.
Compared to traditional markets, platform markets have seen faster dynamic evolution. Platform companies compete through user development driven by network effects, and product iteration is driven by learning effects. Companies with strong learning capabilities, even if they enter the market at a later date, can challenge the incumbent’s market position and even beat it, such as Google’s search engine overtaking Yahoo’s search engine. This is because of the blurred and volatile nature of platform markets. Therefore, platform companies need to take into account the constraints of competing platform ecosystems when setting internal governance rules.
Constrain from algorithms
The third constraint is linked to data and algorithms. Big data and advanced algorithms are a digital platform’s strengths, but data and algorithms are not a panacea. In terms of data, digital platforms often rely on data generated in the virtual world to understand people’s behavior in the real world.
However, while the virtual world is mapped onto the real world, they are not necessarily equivalent. At the same time, although the platform owns user data within their platform, the data of a single platform is still limited compared to the rich behavior of users across multiple platforms. As a result, some platforms are willing to collaborate and share user data.
In terms of algorithms, there are real issues as to whether the platform’s algorithms fairly and appropriately reflect the platform’s governance rules, and whether the platform’s algorithms are effective in achieving the goals of governance. Artificially designed algorithms are all flawed in some way. If the platform’s governance rules rely entirely on algorithms for automatic execution, platform users can circumvent the platform’s governance rules once they recognize flaws in the algorithms. Therefore, data and algorithms are only instruments for governance, and cannot replace effective rule design.
Wan Xing is a professor from the School of Business Administration at Nanjing University of Finance and Economics.
Edited by WENG RONG