Internet-Based Firms

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Discussion

2. Esko Kilpi in an essay on Medium, “The Future of Firms,” reflecting on economist Ronald Coase’s theory of 20th century business organization [1]:

“The existence of high transaction costs outside firms led to the emergence of the firm as we know it, and management as we know it….The reverse side of Coase’s argument is as important: If the (transaction) costs of exchanging value in the society at large go down drastically as is happening today, the form and logic of economic and organizational entities necessarily need to change! The core firm should now be small and agile, with a large network.

The mainstream firm, as we have known it, becomes the more expensive alternative. This is something that Ronald Coase did not see coming. Accordingly, a very different kind of management is needed when coordination can be performed without intermediaries with the help of new technologies. Apps can do now what managers used to do.

Today, we stand on the threshold of an economy where the familiar economic entities are becoming increasingly irrelevant. The Internet, and new Internet-based firms, rather than the traditional organizations, are becoming the most efficient means to create and exchange value.” (https://medium.com/the-wtf-economy/networks-and-the-nature-of-the-firm-28790b6afdcc)


Asymmetric Competition Models

Tim O'Reilly:

"Here are some key lessons for companies wanting to emulate the success of Internet marketplaces like Amazon, Google, Uber, and Airbnb:

  • Lower transaction costs are what drive the evolution of the market from traditional firms to large networks. Therefore, focus relentlessly on lowering barriers to entry for both suppliers (workers) and customers.
  • Networks aggregate customers very effectively, reducing the number of other companies that sell directly to those customers, thus leading to industry consolidation. As Jeff Bezos famously said, “[Their] margin is my opportunity.” Look therefore for fragmented markets where technology allows you to create new economies of scale, going directly to consumers rather than through intermediaries.
  • Networks aggregate suppliers very effectively, increasing both the total number of available products and the total number of suppliers. In addition, as they evolve, networks become a breeding ground for new kinds of intermediaries. Suppliers range from single individuals offering a single product to huge firms, with many levels of smaller firms, and also intermediaries who aggregate those smaller firms, as well as those who provide services to individuals, smaller firms, and the platform itself. Therefore, build in mechanisms that will support suppliers of all sizes. (Note to policy makers considering the employment status of on demand workers: suppliers to on demand platforms will eventually include companies of many sizes, not just individuals.)
  • The lower costs of doing business at scale make it possible to offer products to the market at lower prices, increasing demand. Be sure to pass savings on to the customer. Given sufficient investment, you can scale more quickly by passing on the savings even before you get to scale. Jeff Bezos was able to convince the market of this proposition, enduring years of losses or very low margins even as a public company in order to reach massive scale. Uber appears to be following the same playbook.

That being said, use market mechanisms and data to innovate on pricing. Google famously revolutionized advertising by creating an auction system that favors the most effective advertisements rather than the highest bidder. I expect similar business model innovations in the on-demand space, as the power of big data makes it possible to make a real time market in various kinds of services.

Networked platforms serve customers who were previously hard to reach, thus increasing the total number of customers. Therefore, don’t just skim the cream. Build mechanisms to extend your network to underserved populations, creating new markets. Many of the second-tier on-demand companies are doomed to fail because they only target small populations of affluent consumers, rather than finding a path in which the virtuous circle of scale and lower cost eventually allows them to serve a much broader market.

When you open the market to an unlimited number of suppliers, you must invest in reputation systems, search algorithms, and other mechanisms that help bring the best to the top. Simple, easily gamed reputation systems are table stakes; over time, more sophisticated curation will be necessary. Internet era networks don’t just seek to eliminate workers, they seek to augment them. Invest in software that empowers your workers, allowing them to multiply their effectiveness and to create magical new user experiences for customers." (https://medium.com/the-wtf-economy/networks-and-the-nature-of-the-firm-28790b6afdcc)