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.
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