The economics of markets and platforms

• Published date: 01 January 2019
• Date: 01 January 2019
• DOI: http://doi.org/10.1111/jems.12290

Received: 25 August 2018

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Accepted: 28 August 2018

DOI: 10.1111/jems.12290

The economics of markets and platforms

Daniel F. Spulber

Strategy Department, Kellogg School of

Management, Northwestern University,

Evanston, Illinois

Correspondence

Daniel F. Spulber, Strategy Department,

Kellogg School of Management,

Northwestern University,

2211 Campus Drive, Evanston,

IL 60208.

Email: jems@kellogg.northwestern.edu

Funding information

Qualcomm; Kellogg School of

Management; Ewing Marion Kauffman

Foundation

Abstract

Advances in the study of both markets and platforms contribute to economics.

Platforms are typically digital markets, although platforms can designate

markets generally. So, the economics of markets and the economics of platforms

are one and the same. Platforms show the critical role of intermediaries in

endogenous price adjustment and market clearing. The platform model

remedies problems with general equilibrium analysis by combining and

extending the basic Walrasian and Marshalian market models. The analysis

of platforms provides explanations for the bid–ask spread, including market

power, search costs, matching costs, adverse selection, and moral hazard. The

study of platforms demonstrates the importance of participation and coordina-

tion in the formation of markets. The discussion emphasizes that platforms

have significant implications for the theory of the firm. The analysis further

considers how platforms affect innovation and entrepreneurship.

KEYWORDS

bid–ask spread, ecosystem, entrepreneur, innovation, intermediaries, market, market maker,

market microstructure, match maker, networks, platform, sharing economy, theory of the firm,

two‐sided markets

JEL CLASSIFICATION

D00, D40, D47, L14, L26, O30

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INTRODUCTION

When I first began to write about the major contributions of intermediaries to the economy (Spulber, 1996a, 1996b,

1999), these aspects of markets were much less visible and not well understood. Economists traditionally emphasized

production rather than transactions and ignored retail, wholesale, and financial intermediaries. All of this changed with

the development of e‐commerce and the success of online companies, such as Amazon, eBay, Etsy, Alibaba, and PayPal.

As online marketplaces proliferated, the idea of intermediaries not only became intuitive but evident to academics and

practitioners alike. With the emergence of the sharing economy and companies such as Uber and Airbnb, many aspects

of market makers and match makers are now apparent to practically everyone.

In this paper, I argue that the economic study of platforms sheds light on markets in general. Advances made by the

study of platforms represent fundamental developments in economics. Conversely, the study of markets, in general, is

the study of platforms. As digital technologies permeate the economy, it is not necessary to draw a distinction between

markets and platforms. I outline some of the developments in economics that come from work on platforms. Without

making a comprehensive survey, I identify some of the main research issues.

J Econ Manage Strat. 2019;28:159–172. wileyonlinelibrary.com/journal/jems © 2018 Wiley Periodicals, Inc.

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I gratefully acknowledge research support from Qualcomm, the Ewing Marion Kauffman Foundation, and the Kellogg School of Management.

ORIGINAL ARTICLE