Multi-sided Platforms

by Andrei Hagiu & Julian Wright

Overview — There is growing interest in the economics of multi-sided platforms (MSPs), which-like eBay, Uber, and Xbox-get two or more sides on board and enable interactions between them. In this article the authors study firms' strategic positioning decisions between a multi-sided platform (MSP) mode and three alternative modes. The main focus is on the choice between operating in MSP mode and operating in vertically integrated (VI) mode. The authors provide a formal model of this choice. The model highlights the key trade-off between the coordination benefits of the VI mode when there are spillovers across the decisions of individual professionals/employees and the benefits of the MSP mode in motivating unobservable effort on the part of professionals/employees. The authors also study how this trade-off shifts according to the nature of contracts available under the two different modes. Finally, they also highlight some of the key trade-offs that arise in the choice between operating as a MSP or as a reseller, and between operating as a MSP or as an input supplier. Key concepts include:

  • Economic trade-offs drive organizations to position themselves closer to or further away from a MSP model, relative to more traditional alternatives such as retailers, vertically integrated firms, or input suppliers.
  • The paper provides a comprehensive discussion of the defining features of MSPs, along with a new definition of MSPs that clarifies what makes them special.
  • At the most fundamental level, MSPs have two key features beyond any other requirements (such as indirect network effects or non-neutrality of fees): 1) They enable direct interactions between two or more sides, and 2) Each side is affiliated with the platform.

Author Abstract

We study the economic tradeoffs that drive organizations to position themselves closer to or further away from a multi-sided platform (MSP) business model, relative to three traditional alternatives: vertically integrated firms, resellers, or input suppliers. These tradeoffs lead to a comprehensive discussion of the defining features of MSPs. The formal model we develop focuses on the MSP vs. vertical integration choice, which we interpret in the context of professional services. A key tradeoff emerges between the need to motivate observable effort by professionals (best achieved by a MSP) and the need to coordinate decisions that generate spillovers across professionals (best achieved by a vertical integrated firm). We show how this baseline tradeoff is impacted by the nature of contracts available to the vertically integrated firm and the MSP, and whether professionals hold private information.

Paper Information