Master Class with Austan D. Goolsbee: The Power of Platforms

The Class: Platform Competition

The Background

For many years in the 1990s and 2000s, I taught a class on telecom, media, and technology. At the beginning, students were interested in all three. Over time, they were mostly interested in the media and tech, and then just the tech. So it evolved into a class about internet business strategy with a heavy dose of public policy.

A couple weeks of that course were about platforms. It was among the students’ favorite parts and it was fun to teach, so five years ago I decided to try making a whole class on that topic. The response has been better than I ever imagined, and the whole thing is great fun.

One theme in my class is that platforms are about economics, not just about the internet. Platforms are businesses with at least two different sides of customers—for example, consumers who buy your product and the advertisers who pay you to reach those consumers—and one side cares about the other side. There are a lot of multisided platform businesses that predate the internet, like newspapers and credit cards. The economics and strategy for these businesses have key things in common. The economics are identical, and it’s neat to see how similar the business decisions of newspapers in 1920 were to Pandora or Facebook in 2021.

Digital platforms started in the late 1990s, and they are only getting more common and more powerful every year. We look at how a two-sided platform can often be much stronger than a one-sided business that’s doing similar things—for example, when Uber displaced taxis and when the Apple iPhone with its app store displaced BlackBerry.

That strength comes with a downside, of course—in public-policy terms, from the consolidation of corporate power and the importance of antitrust, but that’s the subject of a different class.

The Classwork

The class is a five-week, case-based course offered six times each school year. You have to know microeconomics in order to get into the class. I’m pretty strict about that. But that’s all you need on the first day. If you don’t know anything about platforms or you were CEO of a platform, that’s fine with me. Students are graded on class participation, case write-ups, and a final exam. We have about 400 students take the class each year, and each section has about 65 students. We cover five topics.

First, we look at the business models and pricing decisions of platform companies—decisions like: Which side of the business should you charge? Should you have subscription fees, or should you try to do it off of advertisers? We start off with a series of cases, like the New York Times adding a paywall on subscribers, Pandora deciding not to put in a subscriber paywall but instead to look for ways to get higher advertising revenue, and Facebook about 10 years ago deciding whether to charge game developers higher fees on their platform.

The second topic we explore is platform strategy as a stand-alone—how you make strategic decisions in a multisided business setting. Basically, the key is always thinking through the direct implications of a move versus the indirect effect on the other side of the platform.

Next, we explore what happens when the platforms compete against each other, with cases like Microsoft trying to challenge Google’s search dominance or Uber going to China and trying to take on the incumbent rideshare players.

As the fourth topic, we think through the economics of whether the industry is going to be winner takes all or have multiple winners. How do you think through the economics in a platform of which there would be just one concentrated winner?

And the fifth topic is indirect competition, where the competitors aren’t in the same line of business. Instead, some feature or adjacent business moves itself in and takes away the platform’s business—when features become the platform.