FT Chinese Column

Having closely examined Mainland China’s online car-hailing market, it is clear that aggregation platforms like Amap Taxi are on the rise. A driver who recently entered the car-hailing industry told me that some of the self-operated, traditional platforms discriminate against newly joined drivers. This means newbies end up being assigned with less profitable orders while drivers who have been on the platform longer are given better rides. This is why drivers with less history on a platform prefer to get work from aggregation ride-hailing platforms. In fact, biases in these platforms are common, as it could be due to the platform’s market position. It may also be down to the relationship between platforms and manufacturers, including how their profits are split. As long as the platforms have a certain level of monopoly power, it is inevitable that the platform will be biased. A crucial question is whether this bias will dull the motivation of manufacturers and harm consumer interests?

One related issues caused a stir just a few years ago. On Amazon, the US-based global leading online shopping platform, hosts many third-party sellers. The debate was whether Amazon should be banned from selling products similar to those of its third-party vendors. Those for this argument think promotions on Amazon significantly impact a seller’s business. If Amazon is allowed to sell its own similar products, the platform directs more traffic to its own products, which then suppresses third-party goods. This favouritism undoubtedly distorts the platform’s ecology, trampling over the grassroots economy formed by small and medium-sized vendors (Note 1).

Defenders of Amazon point to the high costs in building a popular ecosystem. In this regard, they believe the platform should be allowed to make adjustments to commercialise and capitalise on online traffic. They suggest that the platform could even sign contracts with third-party sellers and provide them with support. On most shopping platforms, products are mainly differentiated by their quality and the innovation element being a smaller consideration. In these cases, platform bias does not raise skewed results. When it comes to creative products, however, vertical differentiation is critical. The success of one seller will create anxiety among competitors so the disruption of platform bias is evident.

The most typical example of a platform market with vertically differentiated and highly innovative products is in digital cultural products, such as music, film, television, and literary works. Renowned industrial economist Joel Waldfogel published “Digital Renaissance: What Data and Economics Tell Us about the Future of Popular Culture.”

Published in 2018, the book praised how digital platforms encourage grassroots innovations. Waldfogel, who is also a professor at the University of Minnesota, put forward the view that digital platforms drastically reduce consumers’ search costs and the cost of introducing new products into the market. Some of the products that few people show interest in in traditional markets could find a niche customer base on a digital platform (Note 2). Such an ecosystem offers favourable conditions for a diversified market, giving budding and creative workers an opportunity to make a name for themselves. This could also revive literary and artistic gems that previously went unnoticed.
I invited Professor Waldfogel to visit China last year. We had in-depth discussion on issues surrounding digital renaissance. When he was writing his book, cultural digital platforms were operating in a more “passive” manner with the main goal of matching consumers and manufacturers. In the past decade, however, platforms have been operating in an increasingly proactive manner. This is particularly true in China’s digital art and entertainment market, where a platform’s push and manipulation can dictate the fate of a creative product. When it is often stated that online traffic is king, the idea of beating the odds with little online interest is a myth. This shows that platform bias can make or break a market and control industry innovation.

Together with Professor Feng Zhu of Harvard Business School, we examined platform bias in Chinese platforms for web novels. The majority of web novel platforms offer two contracts with authors. One is where the platform buys out the work. The other is where profits are split between the platform and author. The first resembles a self-operating mode and the latter is akin to a third-party seller. This is why platforms tend to direct more web traffic to web novels they have acquired.

If creative works are sold off to platforms, revenues are then disassociated from the quality of the novels. As such, many authors choose to take a step back, give up new ideas and simply cater to what readers want. In other words, novels that are favoured by the platforms lack creativity. Our research paper uses a large volume of micro data to illustrate how this conflict plays out in an increasingly competitive market and its impact on consumers as well as innovations in the industry (Note 3).

Getting digital platforms to allocate their resources reasonably through a well-designed mechanism has become an important topic in platform-economy research. Short-term profits often turn into long-term obstacles for platforms. Authorities should protect consumers’ rights by regulating the platforms’ conduct for short-term gains. Digital platforms should also seek to strike a balance between their short and long-term interests to ensure a healthy development of platform economy.

Note 1: Feng Zhu and Qihong Liu, “Competing with complementors: An empirical look at Amazon.com,” Strategic Management Journal, Volume 39, Number 10 (2018), 2618-2642

Note 2: Joel Waldfogel, Digital Renaissance: What Data and Economics Tell Us about the Future of Popular Culture, (Princeton University Press, 2018)

Note 3: Yanhui Wu and Feng Zhu, “Competition, Contracts, and Creativity: Evidence from Novel Writing in a Platform Market”, Management Science Volume 68, Issue 12 (December 2022), 8613-8634

Professor Yanhui Wu
Professor of Economics
Professor of Management and Strategy

This article was also published on November 14, 2024 on the Financial Times’ Chinese website