Multi-sided platforms

Andrei Hagiu

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...