Platform Technologies and Multisided Markets – The Case of Electric VehiclesDavid KeithPh.D StudentMIT Engineering Systems Division

Motivating Phenomenon Increasing momentum behind electricity as

a key alternative fuel platform to displace oil dependence.

The (re)introduction of electric vehicles into American showrooms and driveways is imminent.

Numerous and varied vehicle technologies, battery technologies and recharging methods being developed.

The existing electric grid infrastructure capable of supporting some early adopters.

How to efficiently scale up EV technologies to achieve a sustaining market?

Barriers to Adoption of Alternative Fuel Vehicles

Struben and Sterman (2008): Chicken and egg problem – drivers need fuel, parts,

accessories, but energy providers and auto makers need a market in order to develop these things.

Adoption of new technologies strongly path dependent. Many AFV innovations provide spillover opportunities

for the dominant platform. Once a technology has been deemed a failure, it does

not easily recover. Focus on inter-technology dynamics

The State of the EV Market Production plug-in hybrid and all-electric vehicles available in next 1-3

years (depending on who you listen to), from auto incumbents (ie. Ford, GM) and startups (ie. Tesla).

Auto companies each partnered with different battery company. Battery costs prohibitively high at present ~$1,000/kWh, in the order of

$40,000 per 100 miles of vehicle range. Recharging infrastructure extremely limited, but various pilot projects

underway and startup companies with ambitious plans (ie. Better Place).

Market (largely) lacks agreement over technology standards, governance structures, payment mechanisms etc.

What role do inter-firm dynamics have in the ultimate success of EVs?

Industry Examples - InfrastructureBetter Place Coulomb

Infrastructure Recharging points and battery swap stations

Recharging points

Pricing All-inclusive monthly plan fee based on miles driven (vehicle included)Ie. ~$500/month for 500 miles driving

Bring your own vehicle and pay per useIe. ~$4 per 100 miles

Compatibility Better Place vehicles only Any electric vehicle with compatible plug

Locations Proposed for Israel, Denmark, Australia, Hawaii, Ontario, Bay Area

Limited installations currently in Vancouver, Portland, Chicago, Bay Area, LA, Florida, Texas, etc.

Industry Examples - VehiclesTesla Roadster Chevrolet Volt

Powertrain Battery electric Plug-in hybrid

Range 240 miles 40 miles all-electric,640 miles total using on-board gasoline generator

Cost $109,000 $40,000+

Market Segment High performance sports car

Family sedan

Production Volumes Low High (So GM hope)

Availability Now 2011?

Overarching Questions

What is required to achieve a sustaining market for electric vehicles? Deep reductions in battery costs? Government incentives? To whom? Higher oil prices? A gas tax? A single (open) infrastructure? A particular mix of EV technologies? All of the above?

Definition of Two-sided Platform/Market

Definition: “A two-sided platform provides goods or services to two distinct groups of customers who need each other in some way and who rely on the platform to intermediate transactions between them” (Evans, 2003).

In other words, (increasing) returns exist for each group, dependent on the installed base of the complement group.

Example Two-sided MarketsSeller Platform Buyer

Software Developers Operating System Users

Merchants Credit Card Customers

Sellers eBay Buyers

Advertisers Newspaper Subscribers

Doctors HMO Patients

Men Nightclub Women

Platforms typically reduce transaction costs by:1.Matchmaking (ie. eBay)2.Building an Audience (ie. Newspapers)3.Sharing Costs (ie. Operating Systems)

Multi-sided Market Literature

Emerging literature from: Rochet and Tirole (Toulouse) Evans (Chicago) and Schmalensee (MIT) Van Alstyne (BU, MIT Sloan Ph.D) and Parker (Tulane,

MIT Sloan Ph.D) Literature based on formal economic models and

management/strategy books and journals.

Key Lessons from Existing Literature

1. A firm can rationally invest in a product it intends to subsidize/give away in perpetuity even in the absence of competition.

2. The market that contributes more to demand for its complement is the market to provide with a free (or subsidized) good.

Adobe

Content Creators Audience

Acrobat ReaderAcrobat Writer

$0$300+

Applying These Lessons to EVs…

Infrastructure Providers (Better Place, Coulomb etc.) are the Platform, the key enabler.

Consumers most demand sensitive given initial cost of electric vehicles –> subsidize this side. Early evidence of retail stores willing to provide free EV recharging

to attract customers. Cost-sharing analogy fits Better Place business model.

Customers to subscribe to the platform, sharing the costs of infrastructure development, the “API”. Expectation of customer base via platform incentivizes technology providers (ie. Renault-Nissan) to build BP-specific vehicles.

Limitations of Existing Literature

Literature concentrates on information goods, with a particular emphasis on IT applications.

Formal models based on rational choice theory. Formal models limited to two-sided market for tractability. Assumption of “near zero marginal cost” due to

information nature of good (Parker and Van Alstyne, 2000).

No deductive studies have been undertaken despite numerous real-world examples cited.

The Case of Electric Vehicles

Car purchase decisions have much more $$$ at stake than most current MSM examples

Delays: Slow rate of capital stock turnover in vehicle fleet (average vehicle life ~= 12 years)

Numerous Actors Boundedly Rational Behaviour Non-trivial Marginal Cost Spatial distribution of actors Competing Platforms (Gasoline, Biofuels, Hydrogen etc.) Utility bump for EVs relative to incumbent negative initially

Towards an SD Model

Research Questions – Platform Dynamics

Do the findings from analytical models hold when key assumptions (ie. rationality, marginal cost) relaxed?

Which policy interventions are most successful at stimulating adoption of EVs?

To what extent does the vehicle battery size / recharging rate affect adoption of EVs?

To what extent does the backstop role of gasoline in PHEVs have on the emergence of a sustaining EV market?

To what extent do Vehicle-to-Grid (V2G) interactions affect platform development and adoption of EVs?

Research Questions – Platform Competition

To what extent does the existence of multiple incompatible platforms slow market penetration?

Is a single, open infrastructure the preferred arrangement in order to accelerate adoption?

To what extent does the spatial development of infrastructure affect platform competition?

What strategies/partnerships should auto companies, battery companies, component suppliers pursue?

Research Questions – AFV Competition

How do dynamic feedbacks within the EV market affect the market share of electric vehicles when competing with gasoline and other alternative fuels?

How responsive is the EV market to government intervention compared with other alternative fuel platforms?

=> Embed model of EV market dynamics within broader model of AFV dynamics developed by Struben & Sterman.

Thanks

Supervision Prof. John Sterman – MIT Ass’t Prof. Jeroen Struben - McGill

Funding American Australian Association Australian-American Fulbright Commission

References

Evans, D. S. (2003), “The Antitrust Economics of Two-Sided Markets”, Yale Journal on Regulation.

Parker, G.G. and Van Alstyne, M. (2005), “Two-Sided Network Effects: Information Product Design” Management Science.

Struben, J. J. R. and J. Sterman (2008), "Transition Challenges for Alternative Fuel Vehicle and Transportation Systems." Environment and Planning B.