Master Class with Austan D. Goolsbee: The Power of Platforms
In Goolsbee’s Platform Competition course, students learn all about digital platforms, from their economic foundations to the impact of their competition.
- June 25, 2021
- Classroom Experience
The Class: Platform Competition
For many years in the 1990s and 2000s, I taught a class on telecom, media, and technology. At the beginning, students were interested in all three. Over time, they were mostly interested in the media and tech, and then just the tech. So it evolved into a class about internet business strategy with a heavy dose of public policy.
A couple weeks of that course were about platforms. It was among the students’ favorite parts and it was fun to teach, so five years ago I decided to try making a whole class on that topic. The response has been better than I ever imagined, and the whole thing is great fun.
One theme in my class is that platforms are about economics, not just about the internet. Platforms are businesses with at least two different sides of customers—for example, consumers who buy your product and the advertisers who pay you to reach those consumers—and one side cares about the other side. There are a lot of multisided platform businesses that predate the internet, like newspapers and credit cards. The economics and strategy for these businesses have key things in common. The economics are identical, and it’s neat to see how similar the business decisions of newspapers in 1920 were to Pandora or Facebook in 2021.
Digital platforms started in the late 1990s, and they are only getting more common and more powerful every year. We look at how a two-sided platform can often be much stronger than a one-sided business that’s doing similar things—for example, when Uber displaced taxis and when the Apple iPhone with its app store displaced BlackBerry.
That strength comes with a downside, of course—in public-policy terms, from the consolidation of corporate power and the importance of antitrust, but that’s the subject of a different class.
The class is a five-week, case-based course offered six times each school year. You have to know microeconomics in order to get into the class. I’m pretty strict about that. But that’s all you need on the first day. If you don’t know anything about platforms or you were CEO of a platform, that’s fine with me. Students are graded on class participation, case write-ups, and a final exam. We have about 400 students take the class each year, and each section has about 65 students. We cover five topics.
First, we look at the business models and pricing decisions of platform companies—decisions like: Which side of the business should you charge? Should you have subscription fees, or should you try to do it off of advertisers? We start off with a series of cases, like the New York Times adding a paywall on subscribers, Pandora deciding not to put in a subscriber paywall but instead to look for ways to get higher advertising revenue, and Facebook about 10 years ago deciding whether to charge game developers higher fees on their platform.
The second topic we explore is platform strategy as a stand-alone—how you make strategic decisions in a multisided business setting. Basically, the key is always thinking through the direct implications of a move versus the indirect effect on the other side of the platform.
Next, we explore what happens when the platforms compete against each other, with cases like Microsoft trying to challenge Google’s search dominance or Uber going to China and trying to take on the incumbent rideshare players.
As the fourth topic, we think through the economics of whether the industry is going to be winner takes all or have multiple winners. How do you think through the economics in a platform of which there would be just one concentrated winner?
And the fifth topic is indirect competition, where the competitors aren’t in the same line of business. Instead, some feature or adjacent business moves itself in and takes away the platform’s business—when features become the platform.
“Every year, some major thing happens, and we can talk about it, right out of the headlines.”
Current events have been generous to the teaching of Platform Competition. Every year, some major thing happens, and we can talk about it, right out of the headlines.
For example, take the battle going on now over Epic Games’ video game Fortnite and its availability in the Apple app store and the royalty rate the company has to pay to Apple. It’s basically right out of week five of the course. Epic is trying to skirt the app store’s payment system. Apple kicks them out of the app store, and the battle begins. The feature is trying to make itself a platform, and the platform wants to keep them a feature.
Over the years, I’ve brought some of my own research about the economics of the internet and the internet economy into the class. There’s been such a flowering of economic research about these kinds of multisided businesses that it’s been exciting to include that too.
I really think that the concepts and skills from this class will be important for a lot of our graduates. Over the past 15 years, the share of our graduates that go work for the big platforms has just skyrocketed. And many others go to work in consulting or banking and deal with those companies in an adjacent way.
I like to bring humor to the classroom. When I was in college, I was in an improv group, which had several really funny, really talented people who had careers in professional comedy. I saw how much really hard work it is to be that funny. So I figured that going into a field like economics that no one finds funny is really so much easier. Anything even slightly humorous and people are like, “That guy’s hilarious.” I definitely love the social dynamic of the classroom, where we’re just having a good time. We’re laughing. We’re telling stories. The cases are fundamentally just extended stories that we’re trying to figure out.
And I just love how smart the students are. I love their attitude to life. They’re ready to take on the world. And every quarter I teach the course, lots of them come up with company ideas for the New Venture Challenge. It’s fun to see.
From the Students
Naila Dharani, AB ’15, MBA ’20, Full-Time MBA Graduate and Former Teaching Assistant
Professor Goolsbee is a fantastic lecturer and storyteller. We learned frameworks to understand how platform businesses operate—how to evaluate when a market is winner takes all, what the right expansion opportunities are for some platform businesses, and why platform businesses differ.
The content is centered on many large tech companies today, and it’s a tangible way to apply the fundamental microeconomic principles we learn at Booth to specific company scenarios. I’ve used many of the concepts we learned in class at work, most recently the winner-takes-all framework to evaluate companies in the value chain of a new business model we were building.
Pedro Gutierrez, Full-Time MBA Student and Teaching Assistant
I took the class because of the great feedback it’s gotten in every quarter that it’s been offered and because it teaches about applied strategy for tech-related companies. Everyone should take it.
What I enjoyed the most was how Professor Goolsbee used traditional economic notions to explain the current issues that tech companies, big ones and startups alike, face when competing again each other in all sorts of markets.
Perhaps the most important insight I got was learning about the implications and importance of achieving network externalities to succeed. Size matters in terms of network. Keeping a steady positive growth does not mean a marginal-returns situation, but a make-it-or-break-it one.