Liu ChengwenWith the development of the digital economy, online economic activities continue to increase, business models continue to innovate and enhance, and more and more economic and social resources can be allocated by the platform. The platform is not only a neutral trading place that provides services for enterprises, it has greater actual control over online resources, and it is particularly noteworthy that it has a certain pricing power.
We can't help but ask: where does the power of the platform come from, what are the different types and implementation strategies. This is in the direct interest of businesses, consumers and society as a whole.
Platforms have both market and corporate power
On the one hand, platforms have market power. In the past, the boundaries between markets and firms were determined by the transaction costs of both, especially in countries in transition, which maintained market order and regulated market access for certain industries, which constituted the most basic business environment in a country or region. For the digital economy, the platform has become the fourth participant alongside the market and the first enterprise, and there have been some changes in the market characteristics, the biggest change is that the platform has obtained a strong market access right, and it can exercise market power by controlling other participants on both sides of the platform (buyers and sellers or upstream and downstream industrial chains). That said, many businesses have to enter not only the market, but also the platform. Whether you can enter the platform or not is determined by the platform. As a result, the platform actually enjoys market access. Based on this right of access, the platform can formulate various rules to clearly regulate the transactions, rules, product quality, customer complaints, etc. on the platform. The development of the platform has made the division of labor in the online market more detailed, and new formats, new models and new occupations have been emerging and growing, and the platform has become the organizer and manager of the online market.
On the other hand, the platform has the power of the enterprise department. The platform not only has the power and function of the market, but also has the nature of an enterprise, and the internal activities of the enterprise often rely on the authority of the section to organize and coordinate resources in the form of instructions. The platform can represent and control activities across enterprise boundaries through data and algorithms, and systematically integrate the internal functions of a large number of settled enterprises such as advertising, marketing, and R&D, so as to internalize network externalities. In reality, the platform will organize and manage the settled enterprises to a certain extent to adjust the supply and demand relationship. For example, Meituan has developed signs such as "must-eat", "must-stay" and "must-play" based on big data from reviews to guide consumers to choose restaurants, hotels and attractions. The same is true for the allocation of resources in the manufacturing industry, where the digital platform can deconstruct the industrial chain that was originally organized by enterprises and reconstructed by product. For example, there are thousands of manufacturers and merchants on the cloud factory platform, and the flexible small orders that are constantly generated "command" the production activities of each enterprise in real time through the intelligent chain management system.
The main types of pricing power of the platform
In the past, companies set their own prices for their products, reaching a balance in the market based on supply and demand**. A metaphor that is not very appropriate but more vivid is that the company is the athlete and the market is the referee.
Now, the platform has a certain amount of corporate power, which means that it has the power to set prices, and at the same time, it can be used as a market trading place to allocate supply and demand, so as to have a certain amount of direct pricing power. That is, the platform is both an athlete and a referee.
Based on the existing facts, it is not difficult to find that the pricing power of the platform over products can be roughly divided into four types. The first type is direct pricing, which is mainly applicable to the goods and services operated by the platform. In this case, the platform is a middleman like the settled enterprise, and should have the power to set its own price. However, the difference is that the platform is also a market trading venue, which may implement self-preferential treatment for self-operated products, resulting in market unfairness.
The second type is the reference price or guide price, which is mainly applicable to logistics platforms such as online car-hailing and freight trucks, as well as specific links of platforms such as labor dispatch and takeaway. This kind of reference price plays an important role, even a decisive role, in the actual pricing of settled enterprises, and few enterprises can deviate significantly from the platform reference price. In addition, the products on larger platforms such as Jingdong and Tmall have objectively formed a reference price for some smaller e-commerce platforms and live broadcast platforms, and the latter often refers to and formulates a lower than the former.
The third type is the limit price, which is the most applicable and applicable to almost all settled enterprises. In reality, it can be subdivided into different practices such as the lowest price, lower price and ** protection on the whole network, and many platforms will also compensate consumers for the non-minimum price purchased within a certain period of time. Generally speaking, the degree of price limit is often related to the degree of cooperation between the settled enterprises and the platform, and the more closely the enterprises that cooperate with the platform, the more restrictions they face, because close cooperation also means that the platform has stronger professional services and greater traffic injection for the enterprise (such as priority display in the bidding ranking), which also reflects the reciprocal relationship between the platform and the enterprise. For brand stores that are larger, stronger, and have greater external options (such as being able to build their own platform and sell products on multiple platforms), the price limit is relatively small, because they have relatively large bargaining power with the platform. In particular, it is pointed out that the platform requires the settled enterprises to give the lowest price on the whole network, which is actually a manifestation of the competition for the pricing power of enterprises among various platforms, and whoever gets the lowest price will have a greater right to speak. The top anchors of the live broadcast platform also have strong pricing power and can ask for the lowest price to a large extent.
The fourth category is the ** price, which is mainly applicable to the early stage of the platform's establishment, local markets, specific periods, etc. In the early days of the platform, in order to attract both enterprises and users in the bilateral market, it often lowered the ** on the user side and provided subsidies on the enterprise side. But once the platform grows up and the traffic tends to stabilize, users will reduce or cancel subsidies to enterprises at the same time. However, in order to maintain consumers' attention to the online market, the platform will often attract traffic in the local market and launch corresponding activities. Enterprises participating in the platform's activities must accept the first and promise to give greater profits. Of course, enterprises can also not participate in platform activities, but it is likely to lose more platform public domain traffic. In addition, during specific periods such as "Double Eleven" and "618", the platform will cooperate with enterprises to carry out a wide range of activities.
The pricing strategy actually employed by the platform
The platform obtains a certain amount of pricing power, but the actual pricing strategy is difficult to generalize, which roughly includes three types: asymmetric pricing strategy, free pricing strategy and discriminatory pricing strategy. The asymmetric pricing strategy refers to setting a low price on one side of the two-sided market (often the enterprise side) and the other side (often the user), that is, charging higher commissions for the enterprise and driving down the interest rate spread of the company's products. The free pricing strategy is to attract high-quality merchants or users to settle on the platform, and give full play to the cross-network externalities and demand complementarity. Discriminatory pricing mainly refers to the formulation of different ** for different consumers in order to capture more consumer surplus.
It should be noted that low prices are not a normal strategy for platform competition, and will generally tend to be balanced in the online market** and similar to the offline market**. From the perspective of the 4 types and 3 strategies of the platform's pricing power, most of them are to suppress **, but in fact, the platform as a two-sided market has the characteristics of cross-subsidy, which may not only encourage merchants to compete or restrict merchants from raising prices to attract more users, but also may discriminate against consumers to increase the profitability of stakeholders, so it cannot simply be considered that the platform product ** is lower.
Some classical literature has also confirmed that there is a threshold for discounts (such as 10% or 15%), and too low not only does not promote transactions, but can also be a bad signal of "inferior products". Therefore, as in traditional markets, online markets are only discounted in the short term or on a few digital platforms. The short term mainly exists in the early days of the launch of digital platforms, attracting traffic and users through low **. A small number of platforms do take low prices as their own labels to implement differentiated competition strategies, and consumers also know that the quality of their products is low, that is, the platform, the settled enterprises and consumers have reached an implicit contract in their hearts, forming a place for the configuration of inferior products, which is necessary for products with low quality requirements (such as disposable ponchos) and people with low income levels, but this situation will gradually withdraw with the improvement of people's income and consumption levels, and the strengthening of quality supervision and intellectual property protection by regulatory authorities. For digital platforms that have been operating stably for a long time, the quality of their online products is not much different from that of physical stores. There are also a small number of consumers in the physical store to test the product, and then buy the product online, which can save the offline and online price difference, but the quality risk of shoddy products on the store, the greater the quality risk, the greater the price difference, which also forms a balance in the online and offline competition.
The impact of the platform gaining pricing power for the product
On the one hand, the platform has a large number of historical data on both sides of the transaction, and can formulate an equilibrium that can be quickly and better matched between supply and demand in the form of algorithms through big data, artificial intelligence, blockchain and other technologies, which replaces the process of finding equilibrium in the market to a certain extent. Although economics textbooks tell us that the market can reach an optimal equilibrium, in fact it is a process of dynamic adjustment, and the optimal ** will not be achieved automatically all at once. And the market in reality is not completely competitive, the information is not sufficient, and the products are not homogeneous, which leads us to find that the same product is often dazzling in different regions and at different times. Therefore, the process of platform development saves the cost of frequent trial and error in the market, and also moves closer to the optimal equilibrium to a large extent, which is a positive side. The platform can also make personalized and dynamic pricing based on product quality and consumer preferences, and even give effective market** in areas of traditional market failures such as used cars and idle transactions, thereby increasing the profit or utility of both parties to the transaction.
On the other hand, the platform itself is an enterprise, and it acts based on the maximization of its own interests, rather than the optimization of the welfare of the whole society, which leads to the fact that the platform may deviate from the interests of the settled enterprises when formulating or participating in the formulation of the products of the settled enterprises. One potential concern is that when the platform excessively depresses the products of the settled enterprises, it may lead the enterprises to reduce the quality of the products they provide to consumers, especially when the information on the product quality level is not transparent. The result will be adverse selection, with more companies choosing to put low-quality and low-quality products on the platform for sale. More importantly, pricing power is the most important power of independent business entities, and enterprises that have lost (or partially lost) pricing power will not be complete enterprises in the traditional sense, and their ability and willingness to capture business opportunities, conduct R&D innovation, and patient investment may decline, thus affecting long-term economic vitality.
In addition, after the platform obtains the pricing power of products, its market power increases significantly, and it may more exhibit monopolistic or anti-competitive behaviors, such as relying on pricing power to require enterprises to make unified and exclusive behaviors. The "one of the two" that has been hotly discussed in the society, "the network disk is extremely slow if it is not paid, and it is almost impossible to use normally", "film and television platform members enjoy the privilege of on-demand in advance, and members also have to watch advertisements" and so on all belong to this situation. The monopoly of the platform may also be manifested in algorithmic collusion, that is, different platforms grasp each other's pricing rules and (imperceptibly) jointly formulate the ** that is beneficial to both parties.
Therefore, compared with the challenges of pricing in the industrial age, how to reduce costs, promote the matching of supply and demand, and expand the market, the challenges of pricing in the digital age are how to optimize revenue distribution, improve product quality, and maintain enterprise autonomy and market competitiveness.
Liu Cheng is an associate researcher at the Chinese Academy of Social Sciences' Institute of Financial and Economic Strategy