Andrei Hagiu Articles — HBS Working Knowledge

Why Are Web Sites So Confusing?

Published:	October 19, 2009
Feature:	Research & Ideas

Just as bread and milk are often found at far-away ends of the supermarket, Web sites that match consumers with certain products have an incentive to steer users to products that yield the highest margins. The result: a compromise between what users want and what produces the most revenues, say HBS professor Andrei Hagiu and Toulouse School of Economics researcher Bruno Jullien. A look inside the world of search.

Monopolistic Competition Between Differentiated Products With Demand For More Than One Variety

Author:	Andrei Hagiu
Published:	May 28, 2009
Paper Release Date:	April 2009
Feature:	Working Papers

How and when is price competition most significant among firms? This paper develops a theoretical framework for studying price competition between multiple firms. Two examples of markets that fit the description for study are software applications and videogames: There are thousands of software applications as well as games, and different users are interested in different applications and/or games. A given software or game user's tastes may overlap with another's, yet they may have nothing in common with a third's. Thus, although there is a sense in which competition is localized (any given firm competes only with firms whose brands are similar to its own), it is not clear how the fact that consumers are generally interested in purchasing multiple products affects the type of competition waged among firms.

Quantity vs. Quality and Exclusion by Two-Sided Platforms

Author:	Andrei Hagiu
Published:	May 14, 2009
Paper Release Date:	April 2009
Feature:	Working Papers

It is common for two-sided platforms to deny participation to some potential customers, who would otherwise be willing to pay the platforms' access and/or transaction fees. Videogame console manufacturers such as Microsoft, Sony, and Nintendo, for example, restrict access to a select set of game developers and exclude many others by including security chips in their consoles, even though the latter would also be willing to pay the per-game royalties levied by the manufacturers. Apple routinely excludes certain application developers from its highly popular iPhone store. Professor Andrei Hagiu builds a simple model formalizing profit-maximizing two-sided platforms' choice of exclusion policies, which is fundamentally determined by a tradeoff between quality and quantity.

Capitalizing On Innovation: The Case of Japan

Authors:	Robert Dujarric and Andrei Hagiu
Published:	May 8, 2009
Paper Release Date:	April 2009 (revised October 2009)
Feature:	Working Papers

How can Japan create a better business environment for innovation? Japan presents a unique case of industrial structures that have produced remarkable developments in certain sectors but seem increasingly inadequate to do the same in modern technology industries, which rely on ecosystems of firms producing complementary products. Robert Dujarric and HBS professor Andrei Hagiu present three case studies of software, animation, and mobile telephony to illustrate potential sources of inefficiencies. Like all advanced economies, Japan faces two interconnected challenges. The first challenge is rising competition from lower-cost countries with the capacity to manufacture midrange and in some cases advanced industrial products. At the same time, Japan confronts changes in the relative weights of manufacturing and services, including soft goods, which go against the country's long-standing competitive advantage and emphasis on manufacturing. If Japan is to continue to prosper in a world where its ability to rely principally on manufacturing will diminish, its policymakers will need to capitalize on its untapped innovative power.

Platform Rules: Multi-Sided Platforms as Regulators

Authors:	Kevin J. Boudreau and Andrei Hagiu
Published:	October 24, 2008
Paper Release Date:	October 2008
Feature:	Working Papers

Using case studies of Facebook, Tokyo's Roppongi Hills "mini-city," Harvard Business School, and TopCoder, a vendor of outsourced software products, Boudreau and Hagiu explore how multi-sided platforms (MSPs) regulate an industry ecosystem. An MSP is a platform that enables interactions between multiple groups of surrounding consumers and complementors. As the authors demonstrate, the regulatory role played in these cases by MSPs was pervasive and at the core of their business models. That regulatory role goes beyond price-setting and includes imposing rules and constraints, creating inducements, and generally shaping behaviors. These various non-price instruments essentially solve problems that could otherwise lead to market failure. The authors' analytical framework suggests a two-step approach for a platform owner: (1) maximize value created for the entire ecosystem, and (2) maximize the value extracted. "Platform Rules" is a chapter in the forthcoming book Platforms, Markets and Innovation, Gawer, A. (ed) (2009), Cheltenham, UK and Northampton, MA, U.S.: Edward Elgar.

Strategic Interactions in Two-Sided Market Oligopolies

Authors:	Emmanuel Farhi and Andrei Hagiu
Published:	September 19, 2007
Paper Release Date:	August 2007
Feature:	Working Papers

Strategic interactions and the logic of competitive advantage in 2-sided markets are fundamentally different than in traditional, 1-sided markets. For instance, an investment that decreases a firm's costs may increase the profits of its competitors and decrease the profits of the firm undertaking the investment. Such surprising effects arise because of the possibility that 2-sided platforms may end up subsidizing the participation of 1 side. There are also important implications for antitrust scholars: tying and other practices that may appear as harming competition in 1-sided markets can in fact benefit competitors in 2-sided markets.

Why Do Intermediaries Divert Search?

Authors:	Andrei Hagiu and Bruno Jullien
Published:	September 4, 2007
Paper Release Date:	August 2007, revised February 2009
Feature:	Working Papers

(Previously titled "Designing a Two-Sided Platform: When to Increase Search Costs?") Conventional wisdom holds that at the most fundamental level, market intermediaries exist in order to reduce search and transaction costs among the parties they serve and that they are more valuable the larger the cost savings they generate. This would seem to be true of both traditional, brick-and-mortar intermediaries (retailers, shopping malls, brokers, magazines, market exchanges) and "new economy" ones (Amazon, eBay, iTunes, Yahoo), all of which connect buyers and sellers of goods or services. However, many intermediaries, while providing the relevant information, seem at some stage of the process to do the opposite of reducing search costs—and by purposeful design rather than by accident. Retail stores, for instance, stack the products they carry so that the most sought-after items are hard to find and thereby induce consumers to walk along aisles carrying other products. This paper challenges the conventional wisdom that intermediaries create value by reducing search and transaction costs. It proposes a model that sheds light on the economic motivations that in some contexts may lead intermediaries to make it harder for the parties they serve—consumers and third-party sellers—to find each other.

Exclusivity and Control

Authors:	Andrei Hagiu and Robin S. Lee
Published:	August 31, 2007
Paper Release Date:	August 2007
Feature:	Working Papers

Music, television shows, movies, Internet and mobile content, computer software, and other forms of media often require a consumer to join a platform in order to access or utilize the media. This affiliation may take the form of a subscription to a distribution channel or purchase of a hardware device. One of the primary means of differentiation and competition between platforms for consumer adoption is the acquisition of premium or quality content. However, whether or not certain content is exclusive to one platform or is present on multiple platforms varies significantly from industry to industry. One can even view Apple's exclusive U.S. provision of the iPhone to AT&T as even more variation in the degree of exclusivity across industries. Why is it that some forms of content are available only on one platform, while others are distributed through several or all platforms available—that is, they "multihome"? This paper analyzes industry propensity for exclusivity and presents a model of platform competition. The key driving force is the nature of the relationship between the content and the platforms: outright sale (all control rights, particularly over content pricing, are transferred from the content provider to the platform) or affiliation (the content provider maintains control rights over pricing).

Proprietary vs. Open Two-Sided Platforms and Social Efficiency

Author:	Andrei Hagiu
Published:	June 22, 2007
Paper Release Date:	May 2007, revised April 2009
Feature:	Working Papers

The rising popularity of the open-source software movement has prompted many governments around the world to enact policies promoting open-source software systems at the expense of proprietary systems. Oftentimes, these policies seem to stem from a presumption (shared by some economists) that open software platforms are inherently more efficient than their proprietary counterparts. But is that so? This paper provides a simple model of two-sided platforms that clearly shows how this common intuition breaks down in two-sided markets.

Multi-Sided Platforms: From Microfoundations to Design and Expansion Strategies

Author:	Andrei Hagiu
Published:	June 21, 2007
Paper Release Date:	May 2007, revised April 2009
Feature:	Working Papers

The term "platform" is increasingly popular among executives today. Platforms, and multi-sided platforms (MSPs) in particular, serve the needs of interdependent constituents. Although MSPs have existed for centuries in the form of matchmakers and village markets, information technology has increased tremendously the opportunities for building larger, more powerful, and more valuable platforms. At the same time, by expanding the potential scope of platforms, information technology has also increased the number and complexity of factors, both economic and technical, that drive the strategic design of MSPs. Surprisingly, few companies rigorously analyze the underlying drivers of their MSPs, and the emerging business and economics literature on two-sided markets has not been very helpful in this direction, either. This article provides a general framework to help organize managerial thinking about MSPs.

Merchant or Two-Sided Platform?

Author:	Andrei Hagiu
Published:	June 21, 2007
Paper Release Date:	May 2007
Feature:	Working Papers

With ever more sophisticated logistics and the rise of information technologies, intermediaries and market platforms have become increasingly ubiquitous and important agents in the digital economy. While market intermediation is not a new phenomenon, the digital economy has revealed that there can be two polar types of intermediaries: "merchants," which acquire goods from sellers and resell them to buyers, and "two-sided platforms," which allow affiliated sellers to sell directly to affiliated buyers. As examples, retailers like Walmart.com and Amazon.com are (mostly) merchants; eBay is a pure two-sided platform; and Apple's iTunes digital music store exhibits both merchant and platform features. This research is a first pass at delineating the economic tradeoffs between the merchant and two-sided platform modes.

How Software Platforms Revolutionize Business

Published:	September 25, 2006
Feature:	Research & Ideas

Cell phones, the Game Boy, and PCs are examples of products based upon software platforms—ecosystems where independent companies can provide products and services tied to the core technology. Playing in a software platform world can make you rich—ask ringtone creators—but it also demands special management skills that emphasize cooperation over competition. Professor Andrei Hagiu discusses his new book, Invisible Engines.

New Research Explores Multi-Sided Markets

Q&A with:	Andrei Hagiu
Published:	March 13, 2006
Feature:	Research & Ideas

Dating clubs, credit cards, and video games are all examples of multi-sided markets, where firms need to get two or more distinct groups of customers on the same platform. Professor Andrei Hagiu discusses this new field of business research—and why it matters to you.