Modern Monopolies: What It Takes to Dominate the 21st Century Economy book by Alex Moazed and Nicholas L. Johnson explains in depth how platforms grew and captured various facets of human interaction with technology.
The book is must read and understanding the subject Platforms ( e.g. Facebook, Amazon etc.).
Few sections reproduced from the book:
What is prices?
This argument actually accounted for reality: Information isn’t perfect and freely available. Markets solve this problem by exposing the sum total of everyone’s private information in the form of prices.
Ronald Coase and why company was created?
Coase’s theory suggested that it was too complicated or costly for a company to search for and find the right worker at the right time for any given task or to search for supplies and negotiate prices. Each of these costs of completing a transaction in the marketplace was a kind of transaction cost. If there were no such costs, any individual could contract any good he or she needed from the market immediately. There would be no reason to form traditional organizations to produce goods or services. Using this idea of transaction costs, Coase created a “theory of the firm” that described how transaction costs shaped the boundaries of organizations in market economies. According to this theory, organizations came into existence in order to minimize the transaction costs and informational deficiencies that resulted from coordinating economic activity through decentralized market exchanges. A company would internalize activities that it could organize more efficiently than the market and externalize those it could not. A company was, in effect, a small, centrally planned economy that operated within a larger market system.
Concept of Economies of Scale
This dynamic led to tremendous economies of scale, a concept made famous by Boston Consulting Group founder Bruce Henderson. Henderson took an idea from military strategy—concentrating mass to overwhelm the enemy—and applied it to business. His observation was fairly simple: The more of something you produce, the better you get at it. But Henderson’s idea of economies of scale and the “experience curve” enabled managers to conceptualize the relationship between size and efficiency.
Challenges of growth
As a result, most large companies facing competitive pressures (i.e., those that were not granted government-sponsored monopolies) cap out at a size well below total control of their respective markets. Beyond a certain point, growth costs more than it’s worth. This fact fits neatly into Hayek’s concept of why markets were effective. On a small scale, you could coordinate economic activity effectively. But if a company grew too big, it wouldn’t be able to collect and react to all the information it needed to make accurate decisions. As a result, costs would rise, and the company would not be able to expand further in a competitive market. The U-shaped economy-of-scale curve that businesses experienced was a demonstration in microcosm of why central planning didn’t work for an entire economy.
When does value chain change
As Coase’s theory suggested, the goal of minimizing transaction costs was what held each component of the value chain together and made them into one coherent whole. If transaction costs changed significantly, value chains could break up or be reorganized in radically different ways.
Key point
Exponential growth starts slow, but as it compounds, it starts to increase rapidly.
Long term and Noble prize Economist
“The growth of the Internet will slow drastically,” Krugman wrote (1998), as it “becomes apparent [that] most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”
Jack Ma fighting strategy with eBay
As Ma famously said, “eBay may be a shark in the ocean, but I am a crocodile in the Yangtze River. If we fight in the ocean, we lose—but if we fight in the river, we win.”
It is advised to readers to take deep diving with the authors as they have given lots of practical examples about platforms.
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