Alternatives to Booking.com: Understanding platform economics

Given the increasing importance of platforms across the economy, it is necessary for all in positions of authority to understand platform economics 

The Minister in charge of the subject of tourism has said that an alternative to Booking.com is being developed by a Sri Lankan expatriate with the Government’s support to break the platform’s monopoly and thereby bring down the commissions paid by owners of tourist accommodation and generate taxes for the Government. The Minister’s comments display poor understanding of how platforms work. Given the increasing importance of platforms across the economy, it is necessary for all in positions of authority to understand platform economics.

International platforms

International platforms are those where buyers and/or sellers are not limited to one country. In the case of tourism, the sellers of accommodation services are located in Sri Lanka. The buyers may come from anywhere including Sri Lanka, but the most desirable buyers would be those from outside the country who would be making purchasing decisions in currencies with greater purchasing power than ours. 

Tourism is a service that is supplied in person, though the bookings can be done virtually. In other platforms, the entire transaction can be completed virtually, without the buyer and seller ever meeting face-to-face. Online freelancing, where services such as logo design or translation can be bought and sold on platforms such as Freelancer and Fiverr, is an example of an entirely virtual economic activity that would not exist if not for the internet.

Around a decade back, LIRNEasia conducted research on the emergent phenomenon of online freelancing. There was considerable interest in our findings which included difficulties in competing with freelancers outside the country and in receiving payments once the work was done. Whilst sharing our findings with groups of freelancers, I recall being asked why we could not have a homegrown platform that would easily solve both problems and would, in addition, stanch the outflow of commissions.

There was nothing preventing the launch of an alternative to the popular platforms from which freelancers made their money, I said. The problem was getting the buyers of online services on to the platform. Convincing buyers outside the country to join a new platform would be a hard task, I said, especially when they were benefitting from the competition among a multitude of freelancers from multiple countries on the established platforms. If you were giving work, would you post your requirements on new, country-specific platform or would you go to a platform with an established brand that had lots of freelancers looking for work, I asked. It is always important to understand demand, rather than looking at the problem solely from the supplier perspective.

Wishing to limit the cold water being poured on the questioner, I went on to talk about the opportunities for platforms that addressed market niches. There could be online freelancing that could only be done by Sri Lankans, such as translations into or from Sinhala or Tamil (this was before the recent advances in machine translation). 

But even in these cases, persuading buyers to use the local platforms would be critical, I said. Once a critical mass of buyers had been assembled, the platform would succeed as now there would be reasons for local suppliers of online services to participate. However, both buyers and sellers would not be limited to the local platforms because the international option existed. The prices would be bounded by what was being offered there. However, the commissions that had to be paid to banks and others who moved the payments may be lower.

Domestic platforms

The familiar ride-hailing apps that have transformed the taxi industry are examples of domestic platforms, though they too have some minor international aspects. Two major ride-hailing platforms exist, though there are no overt barriers to entry such as licensing.

Not having conducted research on ride-hailing I will have to rely on anecdote. A driver of a vehicle I had obtained through a ride-hailing platform started complaining about the commission that was taken by the platform. I pointed out that the conversation would not be taking place had I, the buyer of the service, and he, the seller, not been connected by the platform. 

From his perspective, the most important functionality offered by the platform was the aggregation of buyers like me. From mine, it was the aggregation of drivers willing to offer rides. I find attractive the platform with the most willing drivers, which reduces my waiting time. 

The markets created by the ride-hailing platforms are quite competitive. Both buyers and sellers can defect from a platform easily. In the case of drivers, they may choose to participate in the platform that takes the least commission, but in the end, the buyers a platform has assembled is likely to be the decisive factor. Buyers will choose one or the other platform based on many factors including price and features, but unless there are enough drivers willing to respond they are likely to defect.

The platform with the most drivers will attract the most riders; the one with the most people requesting rides will attract the most drivers. This self-reinforcing quality is described as a network externality. Even though switching costs are low, the early entrants are difficult to displace. If not a monopoly, the ride-hailing business will settle into a duopoly for this reason.

Technically, ride-hailing is a domestic business. Both buyers and sellers need to be proximate for the service to be performed. The one exception is where national platforms allow roaming, like the functionality offered to users of mobile phones who cross borders. Here, the rider has registered on a domestic platform using a credit/debit card as the payment modality. If the app on his mobile phone is recognised by a ride-hailing platform in a foreign country, there would be no need to download a new app and register. The ride could be requested with payment made from the home-country bank.

The problem with the Minister’s plan

When Sri Lankans talk about tourism, they mean providing services to foreigners; policy makers promote tourism because it generates foreign exchange. Here, the similarity is with online freelancing where the buyers with the greater buying power are located outside Sri Lanka and the sellers are located within. The platform with the most potential buyers of tourism services is the most valuable for sellers of those services. 

The challenge facing the Brisbane-based platform developer working with the Minister is not the design of the platform. It is that of attracting a significant number of potential buyers of tourism services outside Sri Lanka, ideally from multiple countries. If that can be done, Sri Lankan hotels, villas and guest houses will willingly participate in the platform. The Minister need not get involved. If he has enough potential buyers, the developer need not limit himself to Sri Lanka. Because few tourists want to limit themselves to a particular country, it would be silly to develop a booking app for a single country.

But attracting a critical mass of buyers is a hard ask. The reason the developer has approached the Minister is because he wants to leverage State power to handicap, if not ban, the currently dominant hotel booking platforms. Given the protectionist instincts of the current Government that may well happen.

The result will be the stanching of the flow of tourists through Booking.com (and similar platforms, most owned by the same holding company). Hotels will have to depend on tour operators for business like in the bad old days. The small-scale accommodation providers will go out of business, unless they can pivot to domestic tourism. The effects on the economy will be dire.

Apparently, the Minister is uninformed about the Amendment to the Value Added Tax Act (No. 4 of 2025) which provides a solution to the problem of taxes. He should focus on the implementation of those provisions rather than respond to the siren call of protectionists who will do serious damage to the tourism industry.