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Flex Explainer | How Three-Sided Marketplaces Work for All

In our second post in this series, we’re going to discuss a crucial but underappreciated element: how app-based delivery platforms are three-sided marketplaces–and why that matters. 

Introducing the key players. What do we mean by three-sided marketplaces? We all know the traditional two-sided marketplace, which consists of buyers and sellers. In those marketplaces, supply and demand ideally maintain a stable equilibrium. 

In a three-sided marketplace, the three sides are consumers (the buyers), local businesses (the suppliers), and workers (who deliver the goods), with app-based delivery platforms acting as an intermediary, serving a convening function between the three sides, ideally as seamless as possible. Three-sided marketplaces are not new, but the scale and consumer adoption of app-based delivery has elevated the importance of understanding this particular market structure. 

In these three-sided marketplaces:

  • Consumers discover local businesses and place orders with those merchants
  • Local businesses find and market to consumers, boosting orders and revenues
  • Workers earn income in flexible and scalable ways by delivering orders

Finding the proper equilibrium–and why it matters. Each of these three groups is different, with varying interests that can fluctuate frequently. Furthermore, each group has different motivations: consumers are responsive to prices and convenience (among other service features), businesses prioritize revenue and reputation, and workers must be compensated for their time and effort. 

App-based platforms mediate those differences, seeking an equilibrium that balances each side’s needs. Platforms are not incentivized to focus on just one or two of the sides of the marketplaces at the expense of another because the carefully balanced equilibrium would be thrown off. After all, it’s complicated enough to find a balance that can change second-by-second. 

Furthermore, scaling all three at the same rate is crucial. That’s because: 

  • If there’s a shortage of workers, consumers see longer wait times and merchants see fewer orders or upset customers. 
  • If there’s a shortage of merchants, consumers look for other options in the highly competitive delivery marketplace.
  • And if there’s a shortage of consumers, merchants and workers look elsewhere to grow their businesses and earn income. 

On the other hand, more local businesses on the platforms means more consumer options. More consumers using the platforms means more merchant revenue and more earnings opportunities for workers. More workers means faster deliveries and options for consumers.

App-based delivery: not merely delivery platforms–but local business engines. In fact, calling them delivery platforms obfuscates the intricate nature of facilitating such three-sided marketplaces. A better conception of app-based delivery might be logistics providers or local commerce enablers—especially considering the scale and consumer-driven on-demand aspect in this space. 

Exactly how much local commerce does this industry power? The first-ever economic impact report of the U.S. app-based industry found that app-based platforms contributed more than $212 billion to the U.S. economy. Drilling down further, app-based platforms generated $32 billion in additional revenue for small businesses. 

Indeed, to give one example, restaurants are finding their economic footing again after a rough spell during the pandemic. A recent Bloomberg column cited app-based delivery is one key reason why, as those platforms help boost restaurant productivity. 

We’d be remiss if we didn’t also mention that app-based delivery platforms use machine learning and automated technologies to help ensure equilibrium in this highly variable landscape. The result is a healthy balance serving the interest of all parties in this three-sided marketplace: customers, workers, and local businesses. 

For instance, app-based delivery platforms use automated technologies to quickly process real-time and historical data that helps platforms account for variables including restaurant preparation speed, merchant location relative to a potential worker, and on the ground traffic patterns. These calculations: 

  • help match workers with a delivery that represents the most efficient use of their time, which, in turn, minimizes the time a worker spends waiting for an order allowing them to spend more time earning. 
  • provide customers with an accurate estimate of delivery time and facilitate quick service. 
  • improve worker safety by providing realistic delivery timeframes that reflect real-time road conditions and the other variables that impact delivery duration. 

* * *

Understanding the dynamics and positive impacts of three-sided marketplaces is foundational to making sound public policy decisions. As the National LGBT Chamber of Commerce and National Asian/Pacific Islander American Chamber of Commerce and Entrepreneurship noted, some recent policy proposals “may pose a threat to the equilibrium of delivery platforms' multi-sided marketplace.” 

Three-sided marketplaces like those enabled by app-based delivery platforms benefit consumers, earners, and local businesses—and at a scale that simply wasn’t possible before. That’s innovation that benefits all. 

Date: 07/11/2024
Category: Flex Insights