On Power and Multi-sided Markets: Internet, Cities, Universities, Hollywood, and Politics

The idea of the two-sided market is best exemplified by eBay. This is hardly a great website (c. 2018), but it remains valuable because it connects buyers and sellers. I look for stuff there because vendors are there. Vendors sell stuff there because buyers are there. eBay gets its middleman cut, and better websites can’t get a foothold since shifting everyone simultaneously is hard. Many tech companies try to do this. Amazon in a similar vein, though it also takes the role of vendor. Uber matches taxis with passengers (but loses money still, and may need to become a fleet operator).  There is lock-in because of the two-sided nature of the marketplace and the value to consumers of a variety of suppliers, and to producers of numerous consumers, despite the competitors. Dating services match people seeking contact.

eBay is just the virtualization of a flea market (or shopping mall). Those are physical places where everyone goes to trade. The shopping mall (and parking lot owner) collects rent from the vendors to be able to participate. In some cases they may also collect rent from the shoppers (charging for parking, for instance). Bars and clubs collect rent (in terms of alcohol sales) from potential mates seeking each other.

Cities

Cities can be thought of as two-sided markets as well. The primary economic function of cities is production.

I am here because you are here, you are here because I am here.

In this case, it is the production process, rather than (or in addition to) the consumption process that is relevant. Laborers and Employers co-locate, people to get jobs, employers to attract workers. Cities (or those who own them, the landowners), if managing this properly, profit from this through taxes and increased property values. In a democratic context, this is an argument for land value taxes, since the land value appreciates because of the actions of others.

Cities compete with each other, but each has some spatial monopoly aspects as well. They also have specialization. Los Angeles for instance specializes in film-making among other things. Everyone is there because everyone else is there. It’s not impossible to make movies elsewhere, yet many if not most are made in greater “Hollywood”.

Hollywood

Each film producer is also a multi-sided market, connecting all the elements of film production (writers, actors, set-designers, directors, sound production, cameras, editing) and distribution, which are otherwise largely independent individuals and organizations that come together to create art and entertainment, and then disband.  As such, producers have power over the system in their coordinating function. Though technically anyone could put together a team, a producer has  connections that cause people to believe that he (or she) will put together a more artistically and remuneratively successful team, and thereby attract people to want to be part of it. Success breeds success and power.  The recent Hollywood scandals relate to the exploitation of power by immoral actors and producers.

Universities

Universities establish several multi-sided markets. Students and  Professors are matched. Now in the modern world, students don’t directly pay the professors, it is mediated by the university, but we can go back in time, and imagine the professors paying rent to the university to have the privilege of teaching, and collecting directly from students. Instead universities commodified teaching and turned professors into laborers.

Researchers and funders are mediated by universities as well. You can’t be an independent professor and expect to get funded by science agencies in the modern world. This is mediated by universities and similar organizations with Sponsored Research Offices. In fact researchers who are not tenured faculty do pay rent to the university in terms of “overhead.”

Perhaps the most cynical relationship is between students and employers. Students come to the university to learn and get a degree, but also become certified as employable, and to get some assistance in finding work (access to job fairs is baseline for this, some schools, especially business schools, go much farther in assisting job placement). So the university is selling itself to students as a place where they can get a first job, and they are selling themselves to employers as a place where they can find labor. In fact universities often speak of training the workforce, as if finding a job with a large organization (as opposed to becoming an independent entrepreneur who starts new companies, much less a well-educated human being) is the goal.

Power and Politics

A different kind of power
A different kind of power

Power accrues to the middleman. Most power comes from being the middleman in a difficult-to-disintermediate multi-sided market. Everyone agrees you have power because of common rationality of beliefs. If everyone thinks that everyone thinks you have power, then you have power, because changing everyone’s beliefs simultaneously isn’t just hard, it’s the veritable herding cats.

People feign loyalty to powerful individuals. Many want to appear to be loyal. Society rewards that characteristic, as someone who exhibits loyal to someone else might be loyal to me. They may even feel loyal (as what better way to appear to be loyal than to be actually loyal). But in the end almost all who claim loyalty will leave when the going gets tough. They will ‘defect’ in game theory terms if they believe that serves their long term interests, like rats fleeing a sinking ship.

Likewise, if everyone believed you didn’t have power, then you wouldn’t. I could act against you and no one would back you.

Power is an interesting thing:

Saudi Arabia has power. Where does it come from? Oil is the surface answer, but it’s not just that, it is how they use oil revenue (and promises of future revenue) to buy friendship. I am not privy to the specific conversations, but if the oil keeps flowing, other people with power (Presidents of the United States) still yield to them.

The following people have been paid by Goldman Sachs, a large investment bank:

Goldman Sachs has power and used the revenue it generated to pay a relatively small amount to cover its bases in the 2016 Presidential election to ensure it had access to power after the election. This is important so that it will be considered Too Big To Fail during the inevitable next crisis, as well as getting better tax treatment in more ordinary times.

U.S. Vice President Dick Cheney shot Harry Whittington during an alcohol-infused car-based quail-hunting trip. Harry Whittington apologized for getting in the way of the bullet and inconveniencing the Vice President. Dick Cheney had power.

So today, the President of the United States has power because enough people continue to agree that he has power, despite a glaring incapacity for the role. If instead he were continuously disobeyed by his staff and the federal government, he would not have any. The risk is that this would bring the whole system down, and people are (rightfully) nervous about the unintended consequences. Revolutions have a mixed history. But the ability to grant power is in our collective selves, and we can choose to not grant it. Consent of the governed is an important concept, but the difficulty of displacing the lock-in of multi-sided markets should not be underestimated.