Platform companies start in the middle but find it necessary to choose a path.
Do you ever wonder why more people don’t produce solar power? Do you ever drive through a neighborhood and see all the roofs as potential energy?
This article is about the HOA of the future, where homeowners become power producers and power utilities become batteries.
As background, we will start with a couple of observations about how newer platform companies mature. The monopsony path may be a consumer-oriented alternative to the supplier-friendly monopolist path now favored by most newer platform companies. The monopsony path could be used to empower important economic initiatives, like alternative energy.
First, newer platform companies, like Amazon, Alibaba, and Netflix start by creating a marketplace platform. They were content to take a piece of every transaction by providing a marketplace for buyers and sellers to come together. Initially, they market themselves as "product agnostic." At the initial stages of growth, this works well. Newer platform companies may leverage technology and Artificial Intelligence to scale quickly. They are satisfied with a smaller piece of the product transaction margin because transactions are growing quickly.
Second, at some point though, the denominator gets too big and their growth rate becomes a victim of their own success. To maintain growth and increase margins, they must make a choice. Which path, the producer side or the consumer side, will the platform company travel to continue its overall revenue growth? This choice is like a fork in the economic road.
In the case of Amazon and Netflix, they have clearly made their choice. They went to the producer side. Amazon is increasing its own retail products, like Amazon Essentials. Netflix has become a large motion picture studio. As such, they are going down the monopoly path. They use their platform scale economies and technology as leverage to profit from the supply side of their platform. They actively compete against and beat the companies that originally supplied their marketplace. At this stage, credible "product agnosticism" is very difficult to maintain. To be clear, I am not saying the platform companies have become a monopoly. This is different. I'm saying it is the path or direction, the company is heading from a supply or demand competition standpoint. This path choice is the result of a fork in the road, a choice the platform company must make to maintain growth.
While platform companies are relatively new, owing to newer technology and data bandwidth capabilities, this appears to be a generalized platform company maturation trend.
Going the monopoly path is not the only direction. The other fork in the road leads down the monopsony path. The monopsony concept was developed by the brilliant economist Joan Robinson. (1) Think of the monopsony path as the opposite of the monopoly path outcome, but with a similar market impact motivation. The monopolist strives to reduce supplier competition and keep the supplier prices higher. The monopsonyst strives to reduce buyer competition and keep buyer prices lower. Traditionally, monopsony behavior is seen in single employer markets (think of a coal town in Appalachia) where the town company is the only buyer of employment. This has the effect of keeping wage prices down. We are using it here in the context of a single buyer of goods (the monopsonyst) buying from a diverse market of sellers. Please note, our use of “monopsony path” is related to, but a variant of, the traditional definition of monopsony. (2)
A new version of platform companies and a demand management implementation of the monopsony path is becoming apparent. This is where a platform company intentionally goes down the monopsony path as a competitive alternative to the monopoly path. The monopsony path occurs by the platform company creating buyer consortiums to aggregate demand. This creates monopsonystic demand pooling and has the effect of driving down supply prices. An example of this is a Chinese online food platform company called Pinduoduo (PDD). They create community buyer‘s clubs to purchase products. This can be used to buy local produce or even robot vacuums. PDD has been successful. It is growing quickly, with its share price growing over 700% since July 2018 and now commanding 15% of a highly competitive Chinese online retail market. (3)
While the monopsony path may be less common in the United States, one can see many applications. For example, what if a community wanted to go "all in" on using solar power. Perhaps this is a community located in a state with favorable tax incentives and plenty of sunshine. (And, if in the state of Texas, as an alternative to a troubled power grid system.) A buyer’s club could be created to buy, in bulk, solar panels and installation services. Then, it could negotiate as a community for favorable utility power buyback rates. The buyers club could be organized through the neighborhood HOA or even at the town level.
In effect, the local community homeowners would become power producers and the local power utility would become a battery. (4)
In this model, a monopsony path committed organization would step in to offer the community a platform to efficiently aggregate their demand and pricing power. Naturally, the monopsony path organization would offer to trade some of the consumer pricing power (also known as consumer surplus) to provide adequate platform profitability. A win/win!
Please note, there is another potential diverging path. The monopsony path we have described is a consumer-oriented path that preserves consumer surplus. In the solar power example, the power company becomes akin to a battery and the platform is able to preserve the consumer surplus for the consumer power producers. However, power companies may respond by actively managing their power buying to extract producer surplus and maintain excess profits. In this case, the power utilities would be exerting a traditional monopsony and attempting to transform consumer energy producers into factor inputs. This would be similar to the coal town model previously presented. This is new territory with interesting game theory and legal implications beyond the scope of this article. (Hint: key drivers are the legal and regulatory rules governing your local utility.)
The monopsony path is a consumer demand-oriented alternative to the default supplier-friendly monopoly path now favored by many newer platform companies. This article presented potential monopsony path examples, from consumer perishables (fruit) to consumer durables (solar infrastructure). The monopsony path platform aggregates demand the capture of consumer surplus and as a consumer-oriented platform alternative to the monopolist path. As Robert Frost's writing suggests, while the monopsony path may be the road less traveled, it may make all the difference.
Notes
(1) In economics, a monopsony is a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers. The contextual usage of monopsony is usually for the buying of factors inputs, like employment. The microeconomic theory of monopsony assumes a single entity to have market power over all sellers as the only purchaser of factor inputs. This is a similar power to that of a monopolist, which can influence the price for its buyers in a monopoly, where multiple buyers have only one seller of a good or service available to purchase from.
Joan Robinson is a largely overlooked economist, probably owing to her gender. In his book The Price of Peace, Zach Carter said “Robinson would be the most accomplished economist of any gender ever passed over for the Nobel Prize.” Also, Carter compared Robinson to R Franklin in terms of being overlooked in deference to other male scientists. See the article Pioneering women of science for more information.
By the way, you will notice throughout the article, I use a ”y” instead of an “i” to modify the word “monopsony.” This is by design and as a tribute to Dr. Robinson. It is also to remind the reader that "Monopsony" and "Monopsony Path" are related but different concepts.
(2) If you are of an economics ilk, our definition of the "monopsony path" may create some confusion. You are correct, the monopsony path is similar but different from monopsony. Traditionally, a monopsony is a way for producers to create excess profits by actively suppressing factor prices. This is owing to a natural advantage such as being the only buyer of factor resources in a particular local market. The monopsony path is different, while it focuses on buyer prices, here, it is focused on consumer, not factor prices. It is also relevant because of the marketplace model. That is, the ability of marketplaces to exert market power has increased in the recent decade. This results in changing dynamics between supply, demand, and the market. In effect, the market has become a separate agent in the traditional competitive supply/demand model.
(3) See The Economist article E-commerce profits may become harder to make.
(4) Power and, more specifically, fuel is a little tricky. Fuel is what creates power. There are two major fuel types. You have renewable fuel (or renewable energy) like solar or wind. You also have non-renewable fuel (or non-renewable energy) like oil, gas, and coal. The big difference between fuel types is when comparing energy production vs. energy storage.
All fuels produce energy. The big difference is, non-renewable fuels also act as an energy store, whereas renewable fuels do not. The great thing about oil is that you can store it for a long time and convert it into usable energy at a moment's notice. The issue with solar is it has no self-storage. Separate storage has to be provided. In the case of solar, it can be stored in local batteries or, as is more common today, it can be "stored" at power utilities. This is the process called "net-metering" where a homeowner's excess solar power produced during the day can get transferred to the power utility. For this article, designating the power utility as a battery is because of the net-metering process. Power utilities have the capacity (and for most states, the legal requirement) to store or otherwise transfer unused power to other uses.
Also, did you ever think of a hydroelectric power lake as a battery? The metaphor works since a hydro lake is storing water for the periodic use of turning turbines to produce power. Think of this the next time you are swimming at your favorite lake. You may very well be swimming in a battery!