Platform Economics and the Power of Scale: Why Big Tech Keeps Getting Bigger
Today, most consumers use various digital platforms to purchase goods and services rather than buying directly from a producer or physical retailer. This has created a growing platform economy where producers and consumers use the Internet to facilitate decentralized exchanges, meaning the consumer can browse the wares of many different sellers in real time. A common example would be popular online retailer Amazon, through which countless sellers can reach many millions of consumers.
Growth of Online Selling Platforms
Selling goods fully online goes back to the mid-1990s, when producers of goods began selling them directly to consumers and could use digital credit card processing to collect payment. Amazon.com famously sold its first book - back when it sold only books - in April 1995. There are earlier examples of buyers and sellers connecting on the World Wide Web, going back to the 1980s, but these were not fully online transactions. Tech-savvy consumers could use their computers to browse message boards for items for sale, but it was far from one-stop shopping.
In 1998, Amazon began expanding beyond books and into other types of entertainment, such as DVDs. The very next year, the growing company began adding non-entertainment items, such as home improvement products. Third party sellers gained access to Amazon in November 2000, with sellers purchasing memberships in order to utilize the website. Back in 2001, third party sellers could purchase a professional selling plan for $29.95 per month and no fees on individual sales, or an individual selling plan for no monthly fee and a $0.99 fee on each sale. By 2024, the professional selling plan had increased in price to $39.99 per month.
Besides Amazon, other online selling platforms for new goods are also popular, especially Walmart. Target is entering the third party seller market with Target Plus by partnering with Shopify, an Internet platform for small businesses. For used goods, eBay and Facebook Marketplace are widely used by consumers and allow prospective customers to negotiate prices with sellers directly. Why have online selling platforms that link third party sellers to buyers become so successful and created “Big Tech” giants like Amazon?
Diminishing Marginal Costs due to Economies of Scale
There are lots of start-up costs to host third party sellers, such as capital goods like computer servers and software developers. However, once a website is created and hosted on a high-quality server with lots of storage space, it can handle thousands of members. A single software development team can theoretically manage an online platform that hosts millions of sellers, making the marginal cost of adding a new member increasingly small.
After an initial investment in employees and equipment, each new subscriber spreads the average total cost and average variable cost among an increasing number of subscribers. This decrease in average costs, however, is only temporary. Eventually, if expansion continues, the firm will have to invest in more equipment and workers, causing average costs to rise. For services like Internet hosting, this can be delayed for a long time due to the ability of each server to host thousands of subscribers. And, as the firm grows larger, it can enjoy economies of scale by purchasing goods and services in bulk at a discount. For example, a large tech company may be able to add capital goods like computer servers on its own without paying a contractor to do so, reducing its costs.
Amazon creates its own advanced hardware to host its web services, allowing it to bypass contractors who seek to make a profit. This is an example of vertical integration and allows the company to be more efficient: Amazon can move quickly to add more servers and equipment when it is advantageous to do so rather than paying a profit-seeking contractor. It’s not the only one - Facebook, owner of Facebook Marketplace, also builds its own servers, as does online auction site eBay. It is difficult, if not impossible, for start-up firms hoping to create their own online market platforms to compete with the efficiency of hardware-creating tech giants like Amazon, Facebook, and eBay.
Feedback Loop Leads to Increased Consumer Demand
Big Tech has another advantage over start-ups in years of market research. These companies enjoy rigorous feedback loops that provide them with input from customers, particularly what they like or dislike about website and service features. This allows these firms to quickly emphasize what customers like and reduce what they dislike, fine-tuning their product to maximize consumer demand. Users of these sites and services are often asked to provide feedback, such as through surveys, that the companies can use to make improvements.
Start-ups, with few customers, do not enjoy the free market research of rigorous feedback loops. They may have to guess what customers might like, or try to make their product look similar to more-established substitutes. This second option creates the risk of pushing customers to those same substitutes, especially if the start-up cannot offer a much lower price. Customers may also leave a start-up if undesirable features or performance are not changed quickly, preferring to pay slightly more for a smoother experience than handling the “quirks” of a newer site.
Established firms may try to allege copyright infringement to attack newcomers to the market, claiming that a specific feature of their online platform is copyrighted and cannot be copied. While a start-up may not be trying to copy features of a Big Tech product, the threat of a lawsuit may sink the start-up and dissuade others from entering the market. Feedback loops may help large tech firms identify which customer-desired features to copyright and look to scrutinize start-ups over.
Regulatory Concerns: Big Tech Monopolies?
Many critics argue that some Big Tech firms, especially Amazon, have become monopolies. Similar to criticism of retailers in the early 2000s allegedly bullying suppliers over pricing, with stores like Walmart and Target threatening to place the goods of suppliers who did not fall in line in places where fewer customers would see them, digital marketplaces like Amazon and Walmart can “bury” sellers in search results. In the 2000s, if you upset the retailer you would end up with less desirable shelf space, harming your sales. Today, if you upset the online host, your product does not show up anywhere near the top of a customer’s search.
Amazon, Walmart, Facebook Marketplace, and eBay are not pure monopolies in terms of selling goods and services, but they are scrutinized by governments for allegedly engaging in anti-competitive behavior. They can manipulate search results and ensure that favored third party sellers appear at the top, guaranteeing more likely sales. And, for many small businesses, being a third party seller on a site like Amazon, Walmart, or Target Plus is a necessity because it is the only way for them to reach a wide base of consumers. This importance for small businesses makes it difficult for governments to threaten strong regulations of Big Tech - hurting the online marketplace platform could hurt innocent small businesses.
This is a similar concept to “Too Big to Fail” during the Great Recession, when the U.S. federal government controversially bailed out failing banks. The rationale behind the bailouts would be that bank failures would hurt the broader financial market and innocent consumers. Today, Big Tech online marketplace hosts could insinuate that major regulations could hinder their ability to help small businesses make sales, harming both sellers and consumers. This creates a conundrum: allow Big Tech firms to operate with minimal oversight and potentially behave in anti-competitive ways, or enforce staunch regulations and potentially force some small businesses and customers out of the market when the host makes cuts?
