How do comparison shopping sites make a living? An update

First published on IPdigIT.


Comparison shopping sites, also known as shopping robots or shopbots, have been around for about two decades. Sites such as,, PriceGrabber, Shopzilla, Vergelijk or Kelkoo help us find goods or services that are sold online by providing us with loads of information (products sold, price charged, quality, delivery and payment methods, etc.). As they present the information in an accessible way and display links to the vendors’ websites, shopbots significantly reduce our costs of searching for the best deal.

The most common business model for shopbots is to charge sellers for displaying their information while letting users access the site for free. Fees can be computed in different ways, as explained by Moraga and Wildenbeest (2011, p. 4):

Initially, most comparison sites charged firms a flat fee for the right to be listed. More recently, this fee usually takes the form of a cost-per-click and is paid every time a consumer is referred to the seller’s website from the comparison site. Most traditional shopbots, like for instance, and operate in this way. Fees typically depend on product category—current rates at PriceGrabber range from $0.25 per click for clothing to $1.05 per click for plasma televisions. Alternatively, the fee can be based on the execution of a transaction. This is the case of, which operates according to a cost-per-acquisition model. This model implies that sellers only pay a fee if a consumer buys the product. Other fees may exist for additional services. For example, sellers are often given the possibility to obtain priority positioning in the list after paying an extra fee.

How can such a business model be economically viable? To answer this question, we need to understand how shopbots create value for both retailers and consumers, so as to outperform their outside option, i.e., the possibility for them to find each other and conduct transactions outside the platform?

A quick journey through a number of landmark contributions to the theory of imperfect competition will help us understand the importance of price transparency and search costs. To use a simple setting, think of a number of firms offering exactly the same product, which they produce at exactly the same constant unit cost. They face a large number of consumers. If firms compete by setting the price of their product, Joseph Bertrand has shown in 1883 that the only reasonable prediction of this competition is that firms will set a price equal to the unit cost of production. This result is sometimes called the ‘Bertrand Paradox’ as the competitive price is reached although there may be no more than two firms in the industry.

One important assumption behind this result is that there is full transparency of prices: all consumers are able to observe the prices of all firms without incurring any cost. As the firms offer products that are exactly the same, consumers only care about the price and (absent capacity constraint), they all buy from the cheapest seller, which generates this cutthroat competition.

What happens if it is assumed instead that consumers face a positive search cost if they want to observe and compare prices? Peter Diamond (Nobel Prize in economics, 2010) show in his 1971 paper that the exact opposite result obtains: all firms will price at the monopoly level and no consumer will search. This result, known as the ‘Diamond Paradox’, holds even if consumers have infinitesimal search costs. Belleflamme and Peitz (2010, p. 164) explain the intuition:

In this equilibrium, consumers expect firms to set the monopoly price. A firm which deviates by setting a lower price certainly makes those consumers happier that learnt about it in the first place, but since the other consumers do not learn about it, this will not attract additional consumers. Given their beliefs, consumers have an incentive to abstain from costly search, so that a deviation by a firm is not rewarded by consumers.

The next question that naturally arises is what happens between the previous two extremes. What if consumers have different search costs. In their “bargains and ripoffs” paper of 1977, Steven Salop and Joseph Stiglitz (Nobel Prize in economics, 2001) suppose that there are two kinds of consumers: the “informed” consumers can observe all prices for free, whereas the “uninformed” consumers know nothing about the distribution of prices. Under this assumption, they show that spatial price dispersion can prevail at equilibrium: some stores sell at the competitive price (and attract informed consumers) while other stores sell at a higher price (selling only to uninformed consumers).

In his model of sales of 1980, Hal Varian (now chief economist at Google) establishes the possibility of temporal price dispersion. In his model, the equilibrium conduct for firms is to randomize over prices (to put it roughly, it is as if they were rolling a dice to determine which price to set). As a consequence, at any given period of time, firms set different prices for the same product; also, any given firm changes its prices from one period to the next. This is why price dispersion is said to be temporal.

comparison shopping

Let us now terminate our journey by introducing shopbots into the picture. In the previous models, firms didn’t have to incur any cost to convey price information to consumers. It was consumers who had to search for the information, with some consumers incurring a larger search cost than others for some unknown reason. By adding a new player to the model, namely a shopbot, Michael Baye and John Morgan propose, in their 2001 paper, a more realistic model where the above assumptions are relaxed. In their model, a profit-maximizing intermediary runs a shopbot that mediates the information acquisition and diffusion process. This intermediary can charge both sides of the market for its services; that is, firms may have to pay the intermediary to advertise their price and consumers may have to pay to gain access to the list of prices posted on the shopbot. After observing the fees set by the intermediary, sellers decide whether or not to post their price on the shopbot and if so, which price, while consumers decide whether or not to visit the shopbot and learn the prices (if any) that are posted there.

Baye and Morgan show that price dispersion persists in this environment. This is because the intermediary optimally chooses to make sellers pay for advertising their price on the shopbot, while letting all consumers access the shopbot for free. This means that all consumers are ‘fully informed’ in the sense that they buy from the cheapest firm on the shopbot. Despite this fact, firms earn positive profits at equilibrium (this is due to the fact that they post randomized prices on the shopbot, as was the case in Varian’s model of sales).

The predictions of this model square quite well with the business model that most shopbots have adopted and with the common observation that prices listed on shopbots are dispersed (even though the advertized products are very similar). So, the quick journey that we have made allows us, I believe, to understand better how shopbots can enter the market and survive in the long run.

Important remaining questions are whether shopbots increase the competitiveness of product markets and enhance market efficiency. In this regard, a recent contribution by David Ronayne suggests that “price comparison websites may do customers a disservice”. He explains the intuition in this blog post:

Price comparison websites impose two opposing forces on the markets in which they operate. On one hand, they increase competition between firms, which pushes prices down. But on the other, comparison websites make substantial profits, which they glean in a large part from fees charged to firms for referring customers to them. As explained on Money Supermarket’s website: “Our main income is derived from customers clicking through from results pages and buying a product.” In 2013, the company experienced turnover of £225m (up 10% on 2012), with post-tax profits standing at £35m (up 40% on 2012). This has a knock-on effect on firms. It adds to their costs and therefore affects their pricing decisions, so can lead to them upping their prices.

I would like you to do some research about the effects of price comparison websites on the well-being of consumers. You can also give your opinion referring to your own experience.

(This post updates a previous post published in March 2014.)

The multisidedness of crowdfunding platforms

First published on IPdigIT.



A number of posts on this blog have already dealt with multisided platforms (see here) and with crowdfunding (see here). My aim with this post is to link the two topics and show that crowdfunding platforms are a prime example of multisided platforms. Crowdfunding platforms (CFPs) facilitate the interaction between entrepreneurs trying to raise funds and consumers/investors willing to participate in the financing of new projects. Why can they be seen as multisided platforms? As Evans (2011) explains it, a business opportunity emerges for a multisided platform when three conditions are met:

  1. There are distinct groups of customers.
  2. A member of one group benefits from having his demand coordinated with one or more members of another group; in the jargon of the economics literature, it is said that each group exerts indirect, or cross-side, network effects on the other groups.
  3. An intermediary can facilitate that coordination more efficiently than bilateral relationships between the members of the groups.

As I now show, CFPs meet these three conditions.

1. Distinct groups of customers

CFPs link at least two distinct groups: entrepreneurs (fundraisers) on one side and contributors (funders) on the other side. Some platforms have brought an additional side on board, namely sophisticated investors (such as venture capitalists, business angels, and institutional investors). For instance, two Belgian platforms have chosen this route: MyMicroInvest allows projects to be funded by the crowd together with a professional venture capitalist; has established a partnership with the bank Belfius. The objective is clear: the participation of sophisticated investors is meant to reassure individual contributors; because these investors have much larger capacities and experience to investigate the reliability and success probability of proposed projects, crowdfunders can infer useful information from the choices that these investors make. Note that the opposite may be true as well: sophisticated investors may use the “wisdom of the crowd” as an indicator of the potential success of a new product (something that they may have a hard time to evaluate otherwise). In the same vein, Indiegogo (a CFP popular with hardware projects) has added some celebrity investors (such as Virgin Group founder Sir Richard Branson, or Pay Pal Founder Max Levchin) to its $40 million round in new funds from investors.

2. Presence of externalities

Each group’s valuation of the platform depends on the participation of the other group(s). As far as contributors are concerned, there are two reasons for which they are likely to prefer platforms with a larger number of entrepreneurs: such platforms provide them with a wider set of campaigns that they can choose to support and, in the reward-based model, such platforms also increase the probability that contributors will obtain rewards that fit their tastes. Yet, another force may play in the opposite direction: the chances that any given campaign will be successful (i.e., will reach the required threshold) are inversely related to the number of campaigns that the platform hosts; for that reason, contributors may prefer platforms with a smaller number of entrepreneurs. We may conjecture that the former effects outweigh the latter (in particular if contributors can find some way to coordinate on projects that are more likely to be successful). It is thus reasonable to say that entrepreneurs exert positive indirect network effects on contributors. The same obviously applies in the opposite direction: contributors exert positive indirect network effects on entrepreneurs: entrepreneurs value platforms that are able to attract larger crowds of contributors as they increase their chances to raise the targeted funds; platforms that attract a larger number of contributors are also more interesting because they allow entrepreneurs to showcase their products and to “test the waters” on a larger scale. It is important to note that agents on both sides also care about what the members of their own group do; that is, within-side external effects are also present. Such effects are likely to be negative among entrepreneurs as they compete for the funds that the crowdfunders are willing to contribute: the more campaigns the platform hosts, the tougher the competition. In contrast, positive within-group effects exist among contributors: the project that a particular contributor has chosen to support is more likely to reach the required threshold the larger is the number of contributors who may choose to back this project too. All these effects are summarized in the next figure:

Externalities on a crowdfunding platform

Externalities on a crowdfunding platform

3. High transaction costs

As for the third condition, even though entrepreneurs may be able to connect with the crowd by their own means (here is an example), CFPs undoubtedly offer them both higher prospects of success and lower costs. In particular, CFPs are able to mitigate the problems raised by information asymmetries much more efficiently than any individual fundraiser could do on his/her own (on this topic, see Agrawal et al., 2013). In sum, it seems clear that CFPs belong to the broad class of multisided platforms. If you want to dig deeper, you may want to examine how CFPs differ from well-known multisided platforms such as dating sites, real-estate platforms, or videogame consoles.

Mind. your own. business school – a case study of a multi-sided platform

First published on IPdigIT. This blog post is based on the comments of Master students to an article posted by Paul Belleflamme on IPdigIT in April 2014.


A large part of today’s most successful and fastest growing business ventures is in fact multi-sided. Meaning they enable and derive value from the interaction between at least two distinct groups of participants. The example of mind your own business school (MYBS) illustrates that business opportunities for such multi-sided platforms (MSPs) may also arise in the academic world. As the following quote explains, MYBS serves as a platform that assists future Master students in finding the perfect business school.

After several years of studying, you have a clear idea where your interests lie and what exactly is your cup of tea. Searching this preference in the extensive offer currently existing is like searching a needle in a haystack. We help you by adding specific and relevant search criteria and help you to easily access all the necessary information. (source: MYBS)

This post builds on the example of MYBS to illustrate the concept and challenges of MSPs.

To start with, we need to clarify why MYBS can be described as an MSP. MSPs are intermediaries, such as technologies, products or services, that connect two or more customer groups (Hagiu (2013)). Further, according to Evans (2011) (see also here), a business opportunity for an MSP may arise when three necessary conditions are met: (1) there are at least two distinct participant groups, (2) the platform features indirect, or cross-side, network effects and (3) there are potential efficiency gains from the intermediary role played by the platform. Let us now check whether those three conditions are met for MYBS.

Identifying the different participant groups of MYBS is not entirely straightforward. Clearly, one is readily identified; namely, the group of future Master students, who use MYBS in order to search and compare various Master programs. A second group is made up of the business schools, which offer the different Master programs featured on MYBS. Business schools are typically represented by at least one alumnus. Alumni may thus be seen as a third participant group. Next, there is the group of advertisers, or partners of MYBS. This, potentially fourth, group includes a small subset of the business schools as well as other companies (OTM foods, BeanZ, forGrass) or institutions such as student associations or Deloitte student academy. Finally, MYBS features the Financial Times ranking of Europe’s top 70 business schools. Ranking providers may therefore be a fifth participant group. Be it as it may, condition (1) is satisfied as MYBS connects at least two distinct participant groups: prospective Master students and business schools.

A key element of MSPs is the presence of indirect, or cross-side, network effects. Meaning the presence of participants on one side of the platform generates value for participants on other side(s). For MYBS this is clearly the case. To give an example, a larger number of participating business schools provides future students with information on a larger set of Master programs and by this may enable them to find a better match. In turn, a larger number of prospective Master students, who use MYBS, may increase a school’s chances of attracting the strongest, or most motivated, students.

Finally, interacting with participants from an other side of the platform is more efficient when done via the platform (compared to outside the platform). We will discuss this point in detail later on.

Despite the large number of successful multi-sided business ventures, managing a multi-sided platform is a complex task and, as Hagiu (2013) points out, successful MSPs are the exception rather than the rule. That is why, in the following I will address four fundamental challenges of MSPs and analyse how MYBS deals with them.

How many sides to bring on board?

A first and obvious question to ask when building an MSP business is how many sides to include. Advantages from bringing a further participant group on board may include stronger cross-side network effects, a larger scale of operation as well as an additional source of revenue. Nevertheless, increasing platform complexity may lead to potential conflicts of interest between the different sides and may significantly constrain the platform providers’ (future) strategy.

I discussed previously that MYBS brings between two and five different sides on board: future Master students, business schools and their representatives as well as advertisers and ranking providers. Let us now have a closer look at their relationship to one another.

  • As mentioned before, prospective students and business schools strongly benefit from the presence of one another. Moreover, prospective Master students most likely value the presence of alumni. Here a key challenge of MYBS is keeping the group of alumni motivated as the latter derive no direct benefit from their participation (although they may very well derive indirect benefits from guiding prospective students, representing their Alma Mater, and so on). In this context, MYBS could extend its offer by adding current Master students as contact persons or by including testimonials of current and/or former Master students.
  • The amount of advertising on MYBS is limited. What is more, it is informational and mainly provides more visibility to certain schools. By clicking on the logo of an advertising business school, one obtains an overview of its different Master programs; the logos from other MYBS partners are collected on a separate page. Regarding the question of whether or not to extend the amount of advertising, e.g. by adding further business schools, companies or other education providers (study abroad programs, language classes, etc.), MYBS faces a conflict. Naturally, more advertising partners imply larger advertising revenues. At the same time, however, an increased amount of advertisement may not be welcome by the prospective Master students (disturbance, lowers perceived quality of MYBS and the information provided on it) and/or the business schools (increased competition, advertisement not in line with reputation/image). MYBS carefully needs to balance this trade-off when deciding about its future (advertisement) strategy.

One side that so far is not featured on MYBS are companies in their role as the prospective students’ potential employers (unless the former opt for an academic career). Companies, which are for example partners of certain business schools or employ one or several of their alumni, may provide feedback on the Master programs offered by those schools. Such a service is very likely to be valued by the prospective Master students; nevertheless, a conflict of interest with the business schools is equally likely to arise. Business schools and companies, to a certain degree, compete with one another for prospective students. For instance, depending on the offer, students may decide to postpone their Master studies and first work for a couple of years. Also, a company may be put in an awkward situation if it employs alumni from different business schools.

Features and functionalities

MYBS’ main purpose is to enable students to search, select and compare different Master programs offered by highly reputed European business schools. As such it features a variety of search and comparison tools. Prospective students may search for Master programs via a geographical map, by viewing the top 20 Masters as ranked by the Financial Times, by discovering Master programs in a certain field of study or more structured by means of a search engine with different search criteria such as field of study, study fees or language and duration of the program. Alternatively, students may obtain an overview of the different programs offered by a specific business school by clicking on its logo (provided, of course, the business school opted for advertising on MYBS). For each specific Master program, MYBS then provides a summary sheet with the program’s most important characteristics (study fees, language and duration of the program, country), links to the business schools’ websites (application procedure, funding possibilities), an indicator of the associated living costs (provided by numbeo) as well as, in most cases, the possibility to contact one or more alumni. The last point has to be seen as the key feature of MYBS which sets it apart from competing platforms.

[…] we think it’s essential to not only be guided by cold numbers. The strength of our offer lies in our network. We try to have a contact person for all the masters. (source: MYBS)

For the group of prospective Master students, MYBS yields a significant reduction in search costs and further benefits from one-stop shopping as information from diverse sources is aggregated in one place. Moreover, as pointed out previously, for the majority of business schools MYBS provides the possibility of contacting one or several alumni. Finding such contact persons, who are further willing to share their experience, on one’s own should be rather difficult and time consuming. For the groups of business schools and advertisers, MYBS offers visibility and the possibility to promote their Master programs or other offers to a large and targeted audience. To summarise, there are clear benefits for all participants from interacting via MYBS.

Pricing structure

In theory, MSPs have access to multiple and diversified revenue sources as they include several distinct participant groups (Hagiu (2013)). In reality, however, most MSPs offer their services for free, or at a subsidised price, to at least one side of the platform and derive their profits from the remaining sides.

This is also what one can observe on MYBS. Prospective Master students are the participant group with the highest price sensitivity. Also, information aggregated on MYBS can be found for free elsewhere, although, undeniably, with some effort. As a result, students may access MYBS for free and represent therefore the subsidised side. Advertisers, i.e., business schools and other partners of MYBS, are the money side and pay a fee in order to have their logo featured on the website.

Rules and regulations

MYBS mainly creates value by aggregating information from diversified sources. Its main focus should thus be on ensuring that sufficient and high quality information is provided. To put it differently, as the quality of the information on MYBS is directly linked to the information provided by its participant groups, some type of entry regulation is necessary to ensure a certain quality standard of the platform. How does MYBS put this into practice?

  • First off, to be included on MYBS, a business school has to be featured in the Financial Times ranking of the top 70 European business schools. This focus on a restricted set of highly reputed business schools has several important implications. First, for MYBS it is easier to guarantee that the information provided on their website is accurate and up-to-date when the number of business schools is limited. Second, competition between business schools is restricted. However, it is at the same time restricted to some of the strongest schools. This may provide the featured institutions with additional incentive to provide current and accurate information on their respective websites. Third, MYBS may be particularly interesting for prospective Master students with a strong academic and professional background. The reason is that those students are more likely to fulfil the entry requirements of the featured business schools. Thus, the focus on a restricted set of highly reputed business schools may also feature a positive feedback effect for the group of business schools in terms of the quality, or motivation, of their applicants.
  • Regarding the group of prospective Master students, any prospective student, or more generally anybody, can browse MYBS. In order to contact an alumni or to keep track of one’s favourite Master programs, however, one is required to log in via facebook or linkedin. MYBS hence outsources any identity verification and relies on the controls of the two networking sites. For the prospective Master students this brings with it that there is limited anonymity when contacting an alumnus. The contact details or the identity of the alumnus in turn are not revealed (at least for the first contact) as an alumnus may only be contacted via MYBS.

Now that we have analysed the business strategy of MYBS, how well do you think it is adapted to its competitive environment? On a more general note, in your eyes, what are the prospects for MYBS? Do you have any suggestions in terms of its future strategy? In particular, should MYBS include employers as an additional side? What is more, should the platform expand its offer to non-European business schools, different degrees (Bachelor, PhD) or different fields of study? Or is its focus on a restricted set of reputed business schools and their Master programs its key asset?

A ‘multisourced’ case-study of a multisided platform

First published on IPdigIT.


To paraphrase a famous Belgian surrealist artist: “This post is not a post“. More precisely, it is not a post yet, but it should become one once all your comments will be pieced together. My goal, in a very lazy educational way, is to build a case study of a specific multisided platform through crowdsourcing (which is, according to Wikipedia, “the practice of obtaining needed services, ideas, or content by soliciting contributions from a large group of people“).



The platform that I would like you to study could be of some interest for you if you plan further studies. Its name is MYBS, which stands for Mind Your Own Business School. Its purpose is to help you “find your perfect business school among 1023 masters in 185 cities“.

Here is a list of questions that you can choose to address in your comment (depending on the available information).

  • Why can MYBS be described as a multisided platform (for a definition, see here)?
  • Which sides has MYBS brought on board?
  • Are there other sides that MYBS could bring on board?
  • If yes, what are the pros and cons of such strategy?
  • What is the price structure chosen by MYBS?
  • What are the main functionalities and features of the platform?
  • How do they facilitate the interaction among the members of the various sides?
  • What are the governance rules (regulating access and interactions) put in place by MYBS?
  • How do these rules affect the members of the various sides?
  • In your view, did MYBS choose its functionalities and rules in an optimal way?
  • Are there similar (online or offline) platforms competing with MYBS?
  • Do these competitors share the same business model as MYBS (in terms of number and identity of sides, price structure, features and functionalities, governance rules)?
  • What are the prospects for a platform such as MYBS?

As background readings, refer to the various posts on multisided platforms already published on this blog. Two other useful references are Hagiu (2014) and Eisenmann, Parker and Van Alstyne (2006).

What drives self-regulation in the nascent P2P “ride-sharing” industry?

First published on IPdigIT.

uber The American company Uber has been all over the news in Belgium over the last three weeks. Uber connects passengers with drivers of vehicles for ride-sharing services; it appears therefore as a typical two-sided platform. As Evans (2011) explains it, a business opportunity emerges for a two-sided (or multi-sided) platform when three conditions are met:

  1. There are distinct groups of customers.
  2. A member of one group benefits from having his demand coordinated with one or more members of another group (i.e., there are indirect, or cross-side, network effects).
  3. An intermediary can facilitate that coordination more efficiently than bilateral relationships between the members of the groups.

Uber meets the three conditions. First, the two groups are passengers and drivers. Second, indirect network effects are clearly present; as one can read on Uber website:

By seamlessly connecting riders to drivers through our apps, we make cities more accessible, opening up more possibilities for riders and more business for drivers.

Finally, drivers and passengers would have a hard time to find each other if they could not use the Uber app on their smartphone. Uber made the headlines in Belgium recently because it first launched its service (UberPOP) in Brussels, then was requested to stop this service by the Brussels authorities, and finally counterattacked by modifying its offering and by making it freely accessible for one week. To justify its decision, the Brussels government invoked the fact that Uber service is illegal because it violates several regulations (the drivers do not pass any exam, they do not follow the tariffs and vehicles do not exhibit the required marks). Brussels is by far not the only city in the world where Uber is in conflict with the regulators (Seattle just added its name to the list today); and the same goes for similar peer-to-peer transport platforms such as Lyft, Sidecar, or Turo. One can easily understand that taxi drivers feel threatened by these new business models, which make it possible for you and me to compete with them. It is thus logical that they lobby their local authorities to have these services shut down. One can also understand that regulators take sides with taxi drivers, not only because a taxi strike is a nuisance that any reasonable city council is glad to avoid, but more importantly because these platforms are relatively new and it is therefore not clear whether they correctly protect the interests of all the parties involved (passengers and drivers). In an excellent piece recently published in the Economix column of the New York Times, Arun Sundararajan explains that the current misalignment between newer peer-to-peer business models and older regulations is dangerous because it may impede economic growth.

This is unfortunate, because the emerging peer-to-peer, collaborative “sharing economy” will be a significant segment of the country’s future economic activity, stimulating new consumption, raising productivity and catalyzing individual innovation and entrepreneurship.

In the face of this “regulatory conundrum”, Arun Sundararajan recommends a combination of self-regulatory measures taken by the platforms themselves and some redesigned government oversight:

The solution is to delegate more regulatory responsibility to the marketplaces and platforms while preserving some government oversight, by creating new self-regulatory organizations like those that have succeeded in other markets and industries. (…) the government should recognize that the new peer-to-peer marketplaces have sophisticated controls naturally built in. (…) The platforms have voluntarily adopted additional nondigital safeguards. (…) Self-policing isn’t a universal panacea. We’ll still need government mandates to prevent effects like congestion, or for, say, providing accessible vehicles and ensuring disaster preparedness — things that markets don’t easily self-provide.

I fully subscribe to this view (and, apparently, so does the State of California as it is the first State that made peer-to-peer transport services legal under a dedicated regulatory framework). As noted above, Uber and the other peer-to-peer transport services are typical examples of two-sided platforms. I have already explained in a previous post that

On such platforms, intermediaries have to design various strategies to induce agents on both sides to participate. This might be tricky because of the “chicken-and-egg” problem that pesters all these platforms: to attract one group, you need to attract the other one, but were should you start?

A first role of these platforms as intermediaries is thus to act as platform operators by providing a platform where passengers and drivers are able to interact. Yet, a precondition for having both sides on board is that they can trust each other, which is far from obvious in the presence of asymmetric information. Hence, the intermediaries must also play the role of trusted third-parties; that is, Uber, Lyft, Sidecar and the likes must act as certification agents, mainly by revealing information about the drivers’ reliability or quality. They do so through reputation systems and active supplier screening; another cooperative initiative in this direction is the Peer-to-Peer Rideshare Insurance Coalition, which aims “to build a foundation of insurance best practices, policies and information for P2P Ridesharing.”



If they want to be considered as trusted intermediaries, platforms have to become bearers of reputation and effectively certify the quality and reliability of the drivers that they take on board. It is indeed in the platforms’ best interest to screen drivers carefully so as to keep only the high-quality ones. Why? Because a driver selected by the platform is believed to be of high quality by a passenger unless she previously experienced low quality of some other driver contacted through the platform. Hence, to avoid any stain on its reputation, the platform will directly discontinue the operation of low quality drivers. Understanding that, drivers do not find it profitable to provide a low quality service, implying that only high quality services are eventually provided on the platform. In a nutshell, the platform can be trusted simply because it suffices to have one rotten apple in the bag to spoil the rest of them in no time, something that a two-sided platform simply cannot afford. As many Internet-based platforms share this problem of establishing trust, I would like you to find and discuss some specific mechanisms that they put in place in order to achieve this goal.

Do you believe in sharing or in owning? Do you rely on commons or on private property?

First published on IPdigIT.

An article in the Financial Times (Tim Harford, ‘Do you believe in sharing?’, F.T., August 31/Sept. 1 2013) reminds us of an eternal debate: shall we believe in the ability of humans to adequately share and reasonably use the resources offered by our planet? Or do we have to define property rights so that over-consumption of natural resources, such as fish in the sea, is avoided?

That all persons call the same thing mine in the sense in which each does so may be a fine thing, but it is impracticable; or if the words are taken in the other sense, such a unity in no way conduces to harmony. And there is another objection to the proposal. For that which is common to the greatest number has the least care bestowed upon it. Every one thinks chiefly of his own, hardly at all of the common interest; and only when he is himself concerned as an individual. For besides other considerations, everybody is more inclined to neglect the duty which he expects another to fulfill” (Aristotle)

The outcome is crucial for solving various environmental problems, including probably the most ever challenging issue for mankind: how to address climate change?



Relying on commons might be suicidal. So goes “The Tragedy of the Commons”, a seminal article of Garrett Hardin from 1968 (see here). The tragic story is about a common pasture that everybody can use for grazing livestock:

“It is to be expected that each herdsman will try to keep as many cattle as possible on the commons…the rational herdsman concludes that the only sensible course for him to pursue is to add another animal to his herd. And another; and another… But this is the conclusion reached by each and every rational herdsman sharing a commons. Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit–in a world that is limited. Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons.”

For Hardin, the ruin of the commons is inevitable as individuals cannot internalize the negative consequence that their consumption might have on the resource. But society could find a way out and establish private property rights.

In addition, in a state of commons free for all to use, no one has the incentive to invest in cultivating the land and assuring its long-term sustainability. Because of the lack of exclusivity, there is under-investment in the production. The existence of this negative externality of the market requires the State to intervene, for instance by mandating some enclosure of the commons.

Not everybody would buy the idea popularized by Hardin’s article. One of his most tenacious opponent won the Nobel prize for economics in 2009: Elinor Ostrom. For her, “The tragedy of the commons wasn’t a tragedy at all. It was a problem – and problems have solutions” (T. Harford in the F.T.). Ostrom found that, all over the world, similar environmental problems were solved, again and again, by local communities. For instance, she found that the Swiss farmers of the village of Törbel, in the 13th century, had developed a system of rules, fines and local associations to avoid the over-utilization of Alpine pasture and firewood. In other regions, a lottery system had been designed to adequately allocate the rights to fish. Far away from the grand theory of Hardin that she openly opposed, Ostrom discovered many instances throughout the world where a bottom up approach had developed an effective monitoring system, graduated sanctions for those who break the rules and even some alternative dispute-settlement mechanisms.

Ostrom died last June, but her encouraging message remains. Especially in relation to climate change, a global problem for which global responses are tried, without much success, at regular meetings under the auspices of the UNFCC (already the acronym of this United Nations Framework Convention on Climate Change is scary!). Ostrom believed that focusing on those global agreements was a mistake as the common pool problems are too complex to be solved from the top down. And what about enforcing those global instruments without the support of local communities?



Now, is the ‘tragedy of the commons’ something useful for the justification of intellectual property rights? Hardin’s seminal article focuses on the rights in land. Is it justified to apply his analysis to intangible or informational goods? There is a compelling argument already put forward by H. Demsetz in a leading article of 1967:

“Consider the problems of copyright and patents. If a new idea is freely appropriable by all, if there exist communal rights to new ideas, incentives for developing such ideas will be lacking. The benefits derivable from these ideas will not be concentrated on their originators. If we extend some degree of private rights to the originators, these ideas will come forth at a more rapid pace” (Toward a Theory of Property Rights).

Here are the questions:

  1. Do you believe that most creations protected by intellectual property rights would not exist without those rights? Can you give examples? Are there some types of intangible goods that would probably never come to the fore?
  2. There are at least two main differences between the commons in land and the “commons in ideas”, what are they? How would you call the commons in the area of ideas?
  3. Those who advocate the commons for ideas and criticize the “second enclosure movement” (resulting from the creation of IP laws) believe that there is no need to provide additional incentives to create. Is this convincing in the field of copyright? What other interests would not be protected if no copyright (IP) exclusivity would be granted by the law?
  4. Relying on chapitre 10 of the book of B. Coriat (sous dir. de, Le retour des communs, Les Liens qui libèrent, 2015) authored by S. Dusollier, can you explain how copyright rules tend to weaken the public domain? Can you give three examples?

These are just a few questions to think about in order to further compare the ‘proprietary’ approach with the ‘sharing’ approach of the commons.




Online banking, switching costs and competition: a complex story

First published on IPdigIT.

(Updated February 7, 2013)
In an article published in October 2012 in the New York Times, Nelson D. Schwartz suggests that online banking creates switching costs and, thereby, reduces competition in the US banking sector. The title of the article summarizes the argument in a forceful way: “Online Banking Keeps Customers on Hook for Fees”. Mr. Schwartz illustrates his point with the following anecdote:

“Tedd Speck, a 49-year-old market researcher in Kent, Conn., was furious about Bank of America’s planned $5 monthly fee for debit card use. But he is staying put after being overwhelmed by the inconvenience of moving dozens of online bill paying arrangements to another bank.”

You probably use online banking yourself to pay your bills, to transfer money across your accounts or simply to access your account information, whenever and wherever it pleases you. You will then agree with me that these services are conveniences that you are willing to pay for. For the sake of the argument, say that you value these services up to 100 euros per year.

Lock and wheel

However, whether or not you have already tried to do so, you can easily imagine the hassle of switching your accounts from one bank to another. On top of learning to use another interface, you might have to create a new list of payees, of direct debits, etc. Again, for the sake of the argument, say that you estimate at 50 euros the value of the time and energy that you would spend when switching online banking services.

Such switching costs clearly put your bank in a strong position. Instead of charging you its online banking services at 100 euros per year (i.e., the value that you attach to the services), your bank can increase the fee up to 150 euros (i.e., the value + the switching costs) without fearing that you would leave. In economic terms, switching costs decrease the price-elasticity of demand; it becomes harder to substitute one service for another, which reduces the consumers’ sensitivity to price increases. Consumers are indeed “kept on hook”.

Yet, does the latter — undisputed — fact necessarily mean that online banking services (and the switching costs they create) reduce competition and make customers worse off? The New York Time article follows this line of argument:

“With 44 million households having used the Internet to pay a bill in the past 30 days — up from 32 million five years ago and projected to reach 55 million by 2016 — it’s a shift that has major ramifications for competition. There’s even evidence that fewer consumers are switching banks, with 7 percent of them estimated to be moving their primary account to a different institution in 2011, down from 12 percent last year, according to surveys by Javelin Strategy and Research.”

Mr. Schwartz sees thus a causal relationship between the increase in the adoption of online banking services, the reduction in the level of consumer switching and lower competition in the US banking sector.

Personally, I would be much more cautious before drawing any conclusion from the previous facts. First of all, as well known in economics, correlation is not causality! Second, I would like you to think about some causal effects that Mr. Schwartz may have ignored or underestimated. In particular, I propose as food for thoughts the following two quotes taken from a report published by the Office of Fair Trading (the competition authority in the UK) in 2003:

“As firms realise that they can price above cost to customers once they are locked-in, then these customers become extremely valuable. As a result, competition can mean that firms price very low, even below cost to attract new customers.”

“If switching costs are very low then prices may adjust to prevent customers from switching. So a low level of switching need not imply that switching costs are high.”

You may also want to look at the current advertising campaign of Deutsche Bank in Belgium, which is precisely focused on switching costs. The ad starts with these words: “What would happen if your supermarket behaved like your bank does?” It then shows a cashier asking customers to pay, on top of their bill, additional charges for renting the shopping trolley, for using the conveyor belt, for not having a loyalty card, etc. The ad ends with this question and this ‘suggestion’: “You don’t accept unnecessary charges in your supermarket; why do you in your bank? Switch now to”

(You can find below and here the previous comments on this post; you are certainly welcome to read them but what I am really after is that you form your own opinion.)