A Deep Look Inside Apple Pay’s Matchmaker Economics

The new economics of multi-sided platforms provides a theoretical framework and body of empirical knowledge for handicapping “matchmaker” businesses like Apple Pay. Of course, as the saying goes, it’s hard to make predictions, especially about the future. But the new multi-sided platform economics provides powerful tools for separating new platforms that will likely succeed from those that are going to fail spectacularly. Most would-be matchmakers don’t get it right, though. In fact, platforms are based on one of the most challenging business models there is. Economists, including us, have shown that matchmakers face a difficult coordination problem. They have to get a critical mass of customers that want to interact with each other to ignite and grow quickly. Securing critical mass isn’t just a numbers game. There have to be enough members of both groups that could exchange value to make it worthwhile for either. They need density—what’s known as a “thick market” in trading financial assets—more than just scale. A smaller number of participants who actually want to do business with each other is much more important than a larger number of participants who don’t care so much. Read more at Harvard Business Review.