04 Nov 2011Working Paper Summaries

Multi-Sided Platforms

by Andrei Hagiu and Julian Wright
Research in multi-sided platforms (MSPs) studies how payment networks bring together cardholders and retailers, shopping malls bring together shoppers and retailers, and video game systems bring together gamers and game developers. Andrei Hagiu and Julian Wright propose a new definition of MSPs that aims to capture what makes eBay, shopping malls, Yellow Pages directories, and dating websites different from "regular" firms such as a bakery or car dealership, as well as how to characterize less clear-cut examples. They also discuss the economic trade-offs that determine where organizations choose to place themselves on the continuum between MSPs and resellers, or between MSPs and input suppliers. Key concepts include:
  • Hagiu and Wright define a MSP to be an organization that creates value primarily by enabling direct interactions between at least two distinct types of affiliated customers. Each of the italicized terms is a potential point of difference with existing definitions, with important implications for how organizations make strategic decisions.
  • Contrary to most existing definitions, cross-group network effects or indirect network effects are neither necessary nor sufficient for an organization to be a MSP. Existing definitions based on network effects are both under- and over-inclusive.
  • By requiring that MSPs enable direct interactions, the authors clarify what distinguishes MSPs from resellers such as grocery stores and retailers. By requiring that multiple customer types be affiliated, they also clarify what distinguishes MSPs from input suppliers.
  • The extent to which organizations, especially firms, enable direct interactions is often a decision variable: they can choose where to position themselves on the continuum between re-sellers and MSPs.
  • Among policy implications, this definition of MSP should help competition and regulatory authorities. Authorities have taken mixed approaches in settings identified as two-sided markets or MSPs, sometimes considering both sides of the businesses together and at other times just focusing on one side and wrongly ignoring the other.
  • This definition should also give policymakers and courts a firmer basis for deciding the extent to which a business is a MSP.

Author Abstract

The economics of two-sided markets or multi-sided platforms has emerged over the past decade as one of the most active areas of research in economics and strategy. The literature has constantly struggled, however, with a lack of agreement on a proper definition: for instance, some existing definitions imply that retail firms such as grocers, supermarkets and department stores are multi-sided platforms (MSPs). We propose a definition which provides a more precise notion of MSPs by requiring that they enable direct interactions between the multiple customer types which are affiliated to them. Several important implications of this new definition are derived. First, cross-group network effects are neither necessary nor sufficient for an organization to be a MSP. Second, our definition emphasizes the difference between MSPs and alternative forms of intermediation such as "resellers" which take control over the interactions between the various sides, or input suppliers which have only one customer group affiliated as opposed to multiple. We discuss a number of examples that illustrate the insights that can be derived by applying our definition. Third, we point to the economic considerations that determine where firms choose to position themselves on the continuum between MSPs and resellers, or MSPs and input suppliers.

Paper Information

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