Online platforms mediate the interaction of different types of users with each other. Whenever users interact there is the potential for both positive and negative externalities. Some users, by doing what is rational for themselves, create additional costs for others. For example, people choose to drive without considering the impact the have on traffic for others. Externalities can often be mitigated by carefully choosing the rules by which users interact with each other and the platform.
Mechanism / Market design is an entire academic field that studies how to set up the “rules” of the game so that the best outcome occurs. The solutions that market design offers often involve carefully placing a price on certain actions or eliciting private information from users in clever ways. Other solutions involve deliberately setting the timing at which information is revealed to users or changing the rules that determine the order in which results are displayed in search.
Yahoo ran the best documented use of market design of all the online platforms. In 2008, Yahoo changed its auctions to include a reserve price (i.e. a price beneath which the ad could not be sold). Following the change, revenues increased significantly. The reason that a reserve price increased revenue is that the previous auction format, a second price auction, allowed advertisers to pay a lot less than they were willing to pay. The reserve price allowed Yahoo to use its market power to extract more revenue.
Two other examples of platforms that have used the principles of mechanism design are Quora and LinkedIn. Quora’s credit system rewards good actions on the site such as writing great answers or questions. LinkedIn gathers information about users’ expertise through low friction prompts to [endorse] (http://www.forbes.com/sites/susanadams/2012/12/04/everything-you-need-to-know-about-linkedin-endorsements/) connections.
Below are some other examples of interesting platform design questions.
Users on Facebook often post uninteresting content. Their friends will use Facebook less frequently if there is uninteresting content in the news feed. How should Facebook balance the goal of allowing users to express themselves without ruining the experience for everyone else?
Sellers on Ebay misleadingly title or classify their goods. Buyers are hurt because they see irrelevant results in search. How should Ebay reduce the incentives of sellers to manipulate search?
Applicants for jobs on Monster.com can cheaply send resumes to positions that the applicants are not likely to accept or are unqualified for. Employers must then exert costly effort in screening job seekers for qualifications and figuring out if the candidates are truly interested. How should Monster design the platform so that applicants send an appropriate amount of applications to the right positions?