In today’s tech landscape, it would be hard to overstate the impact of marketplaces. Whether you’re looking for goods, services, or tools, there’s probably an app for that. Marketplaces have become powerful global players, and are often at the center of discourse around policy (think about the impact of Amazon, Airbnb, or Uber, among others).
We sat down with serial entrepreneur Shirish Nadkarni, whose latest book, Winner Takes All: Case Studies in How Online Marketplaces Are Creating Modern Monopolies, digs into the economics of marketplaces and how they become monopolies.
Nadkarni started his career at Microsoft and has founded and sold several startups, including Livemocha, a language-learning marketplace that was acquired by RosettaStone. He currently serves on the board of TiE Seattle, a nonprofit that supports entrepreneurship.
This conversation has been edited for length and clarity.
One argument you make in your new book is that, in many cases, marketplaces are destined to become monopolies. Can you walk us through that?
What’s interesting about marketplaces is getting it off the ground is very difficult because of the chicken-or-the-egg problem, because suppliers will not come until there are consumers, and consumers will not come until there are suppliers..But once that happens, and you get to start the critical mass, the network effects kick in. And as you have momentum…more suppliers want to join the marketplace because there are lots of consumers, and more consumers want to join the marketplace because there are lots of suppliers. So it’s a virtuous cycle where each is feeding the other.
It’s not always the winner takes all. Like in the food-delivery market, we have two major players: UberEats and DoorDash. DoorDash has not necessarily won that market, and there are various reasons for that. But in most situations, Instacart is the dominant leader in groceries, Airbnb is the dominant leader in terms of vacation rentals, and so forth. It has become a winner-take-all situation.
How should marketplaces approach technological innovation, like with Uber and driverless cars?
In the case of Uber, I recall when Travis Kalanick was the CEO, they had a self-driving division that was developing their own technology, because they could see that in the future, you will have driverless cars. There are vendors, like Waymo, which in theory, can provide that technology to you, but they’re also getting into the business of Uber themselves.
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So it’s not clear that you can actually rely on those vendors to supply the technology…you have no choice but to invest in those technologies. But unfortunately, in the case of Uber [which shuttered its self-driving division], I think they run some risks that, in the future, they may not be able to access the technology and they may be rendered obsolete.
What advice do you have for founders looking to create marketplaces in already saturated industries?
What I’ve found is that, generally, it’s very hard to displace incumbents, especially marketplaces, because they become monopolies. But the only way that you can displace them is through new technology platforms.
Let’s go back to the earlier example of Waymo versus Uber. It would have been hard for Google to compete with Uber [with a rideshare offering]. But now they’ve come up with driverless cars, and so their cost structure is going to be dramatically lower than that of Uber. So that’s the way that they are competing with Uber: picking a new technology platform, in this case, using AI.
The question is…can AI be utilized?…That’ll be the next step I see, the evolution of marketplaces where the marketplace really automates a lot of the buying process, and if AI can be utilized as part of that, I think there could be a potential start.
What types of regulation would you like to see or anticipate seeing when it comes to marketplace monopolies in the US?
The House had a subcommittee, which did extensive research on marketplaces like Amazon and Google and Apple and others and had many recommendations. But that was almost three or four years ago. And while there is a lot of activity, the Democrats and the Republicans can’t really agree on what to do. And so they’re kind of stuck at this point.
But there are many things that Congress can do. One is, in the case of Amazon, asking Amazon to spin off its first-party business. It could have certain laws around self-referencing…all the abuses that you’re seeing today in that regard could be addressed by Congress.