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Analyzing the Trade-offs between Functionality-rich and Minimalist Design of Two-sided Platforms

Soumya Sen, Princeton University, Roch Guerin and Kartik Hosanagar , University of Pennsylvania . Solution Methodology. Application. Sequential Three Stage Decision Model:. Amazon Web Services: Initial core features (EC2, FPS, SDB) – Basic, high cost & high value

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Analyzing the Trade-offs between Functionality-rich and Minimalist Design of Two-sided Platforms

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  1. Soumya Sen, Princeton University,Roch Guerin and KartikHosanagar, University of Pennsylvania Solution Methodology Application Sequential Three Stage Decision Model: Amazon Web Services: Initial core features (EC2, FPS, SDB) – Basic, high cost & high value Later additional features (SQS, SNS, DevPay) – low marginal cost, decreasing marginal value for developers IP Multimedia Subsystems: Basic low level APIs are costly for platform, complex for developers Additional high level JSRs are less costly to platforms but very useful to developers Platforms connect consumers of apps and services to their developers. e.g., Internet, social networks (Facebook, Twitter), personal computing (Windows, Apple OSX, Linux), mobile devices (Android, iOS, Symbian), to cloud computing solutions (Google, Amazon) Platforms provide functionalities through built-in APIs, modules, tools. Functionality-rich: Costly for the platform but makes app development easier, so more apps and more consumers. Minimalist: Lower cost for platform, but potentially lower market adoption. Should a new “platform” target a functionality-rich but complex and expensive design or instead opt for a minimalist but cheaper one? The Tradeoff Analyzing the Trade-offs betweenFunctionality-rich and Minimalist Design of Two-sided Platforms Two-sided Platform Model Results Analysis Cross-externality Impact on functionalities: For interior solutions (0 <xc, nd <1), increases in the cross-side externality benefits and favor adding functionality to the platform. In other words, δF*/δα> 0, δF*/δβ> 0 Adoption Stage: Given prices and functionalities, users & developers choose to join Pricing Stage: Optimal prices (pc*, bd*) and optimal adoption levels (xc*, nd* ) that maximizes the platform’s profits is given by Impact of Boundary Conditions: When both cost functions, C(F) and K(F), are convex, the optimal choice lies at either boundaries, i.e. either minimalist or feature-rich Platform’s Utility: (1) Two side’s revenue (2) functionality development cost Design Stage: The optimal number F* of functionalities that should be built into the platform to maximize profits must satisfy Developer’s Utility: (1) Consumer-side externality (2) platform fees (3) development cost (heterogeneous) • Multiple (interior-solution) choices: • Small changes in the relative rate of changes of cost K(F) and C(F) (i.e. cost structure) can lead to drastically different outcomes. • Highlights: • Right choice can be counter-intuitive • Shows the complexity of making the right choice • Provides an analytical framework for reasoning Consumer’s Utility: (1) heterogeneous (2) cross-side externality (3) available app options (4) price

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