Andrei Hagiu

Multi-Sided Platforms

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 versus vertical integration choice, which we interpret in the context of professional services. A key tradeoff emerges between the need to coordinate decisions that generate spillovers across professionals (best achieved by a vertical integrated firm) and the need to both motivate unobservable effort by professionals and ensure professionals adapt their decisions to their private information (best achieved by a MSP). We show how this baseline tradeoff is impacted by the nature of contracts available to the vertically integrated firm and the MSP, and by the possibility of professionals holding pessimistic expectations when deciding whether or not to join the vertically integrated firm or MSP. JEL classification: D4, L1, L5

Exclusivity and Control

We model competition between content distributors (platforms) for content providers, and show that whether or not content is exclusive or “multihomes” depends crucially on whether or not content providers maintain control over their own pricing to consumers: if content providers sell their content outright and relinquish control, they will tend to be exclusive; on the other hand, if content providers maintain control and only “affiliate” with platforms, then multihoming is sustainable in equilibrium. We show that the outcome under affiliation depends on the tradeoff between platform rent extraction (which increases in exclusivity) and content rent extraction (which increases in multihoming), and demonstrate that the propensity for exclusivity can be increasing, decreasing, or even nonmonotonic in content quality. Finally, if a content provider internalizes the effect of its own price on platform demand, we prove that a platform that already has exclusive access to content may prefer to relinquish control over content pricing to the content provider in order to reduce price competition at the platform level.

First-Party Content and Coordination in Two-Sided Markets

The strategic use of first-party content by two-sided platforms is driven by two key factors: the nature of buyer and seller expectations favorable versus unfavorable and the nature of the relationship between first-party content and third-party content complements or substitutes. Platforms facing unfavorable expectations face an additional constraint: their prices and first-party content investment need to be such that low zero participation equilibria are eliminated. This additional constraint typically leads them to invest more less in first-party content relative to platforms facing favorable expectations when first-and third-party content are substitutes complements. These results hold with both simultaneous and sequential entry of the two sides. With two competing platforms---incumbent facing favorable expectations and entrant facing unfavorable expectations---and multi-homing on one side of the market, the incumbent always invests weakly more in first-party content relative to the case in which it is a monopolist. This paper was accepted by Bruno Cassiman, business strategy.

Marketplace or Reseller

Intermediaries can choose between functioning as a marketplace in which suppliers sell their products directly to buyers or as a reseller by purchasing products from suppliers and selling them to buyers. We model this as a decision between whether control rights over a noncontractible decision variable the choice of some marketing activity are better held by suppliers the marketplace mode or by the intermediary the reseller mode. Whether the marketplace or the reseller mode is preferred depends on whether independent suppliers or the intermediary have more important information relevant to the optimal tailoring of marketing activities for each specific product. We show that this trade-off is shifted toward the reseller mode when marketing activities create spillovers across products and when network effects lead to unfavorable expectations about supplier participation. If the reseller has a variable cost advantage respectively, disadvantage relative to the marketplace, then the trade-off is shifted toward the marketplace for long-tail respectively, short-tail products. We thus provide a theory of which products an intermediary should offer in each mode. We also provide some empirical evidence that supports our main results. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.2042 . This paper was accepted by Bruno Cassiman, business strategy.

Two-Sided Platforms: Pricing and Social Efficiency

This paper models two-sided market platforms, which connect third-party suppliers (developers) of many different products and services to users who demand a variety of these products. From a positive perspective, our model provides a simple explanation for the stark differences in platform pricing structures observed across a range of industries, including software for computers and an increasing number of electronic devices, videogames, digital media, etc. We show that the optimal platform pricing structure shifts towards making a larger share of profits on developers when users have a stronger preference for variety and also when there is uncertainty with respect to the availability, or a limited supply, of third-party (high-quality) products. From a normative perspective, we show that the increasingly popular public policy presumption that open platforms are inherently more efficient than proprietary ones -in terms of induced product diversity, user adoption and total social welfare- is not justified in our framework. The key welfare tradeoff is between the extent to which a proprietary platform internalizes business-stealing, product diversity and indirect network effects and the two-sided deadweight loss it creates through monopoly pricing.

Information and Two-Sided Platform Profits

We study the effect of different levels of information on two-sided platform profits – under monopoly and competition. One side (developers) is always informed about all prices and therefore forms responsive expectations. In contrast, we allow the other side (users) to be uninformed about prices charged to developers and to hold passive expectations. We show that platforms with more market power (monopoly) prefer facing more informed users. In contrast, platforms with less market power (i.e., facing more intense competition) have the opposite preference: they derive higher profits when users are less informed. The main reason is that price information leads user expectations to be more responsive and therefore amplifies the effect of price reductions. Platforms with more market power benefit because higher responsiveness leads to demand increases, which they are able to capture fully. Competing platforms are affected negatively because more information intensifies price competition.

Proprietary vs. Open Two-Sided Platforms and Social Efficiency

This paper identifies a fundamental economic welfare trade off between two-sided open platforms and two-sided proprietary (closed) platforms connecting consumers and producers. Proprietary platforms create two-sided dead weight losses through monopoly pricing but at the same time, precisely because they set prices in order to maximize profits, they partially internalize two-sided positive indirect network effects and direct competitive effects on the producer side. We show that this can sometimes make proprietary platforms more socially desirable than open platforms, which runs against the common intuition that open platforms are more effcient. By the same token, inter-platform competition may also turn out to be socially undesirable because it may prevent platforms from suffciently internalizing indirect externalities and direct intra-platform competitive effects.

Quantity vs. Quality and Exclusion by Two-Sided Platforms

This paper provides a simple model of two-sided platforms, in which one side (W) values not just the quantity (i.e. number) of users on the other side (M), but also their average quality in some dimension. In this context, platforms might find it profitable to exclude low-quality users on side M, even though some would be willing to pay the platform access prices. Platforms are more likely to engage in exclusion of low-quality M users when W users place more value on the average quality and less value on the total quantity on side M. Exclusion incentives also depend on the proportion of high-quality users in the overall M population and on their cost advantage in joining the platform, relative to low-quality M users. The net effect of these two factors is ambiguous: it generally depends on whether they have a stronger impact on the gains from exclusion (higher average quality) or on its costs (lower quantity).

Strategic Interactions in Two-Sided Market Oligopolies

Strategic interactions between two-sided platforms depend not only on whether their decision variables are strategic complements or substitutes as for one-sided firms, but also - and crucially so - on whether or not the platforms subsidize one side of the market in equilibrium. For example, with prices being strategic complements across platforms, we show that a cost-reducing investment by one firm may have a positive effect on its rivals profits and a negative effect on its own profits when one side is subsidized in equilibrium. By contrast, if platforms make positive margins on both sides, the same investment has the regular, expected effects. Our analysis implies that the strategy space and the logic of competitive advantage are fundamentally different in two-sided markets relative to one-sided markets.

Controlling vs. Enabling

How does a firm decide whether to employ professionals and control how they deliver services to clients, or to operate as a platform enabling independent professionals to provide services directly to clients? Similarly, how does a manufacturer decide whether to allow sales agents to choose certain costly actions (e.g., kickbacks to clients) or to take control of these actions itself? We answer this question using a principal–agent framework in which both the principal and the agent must be incentivized to carry out investments (or effort) that increase the revenue they jointly create. Our theory explains when the principal should take control over a particular decision (“control”) or should instead allow the agent to make the decision (“enable”). It does so both for the case when there are multiple such transferable decisions for a single agent, and for the case when there are many agents and one transferable decision for each. We also consider the possibility of cost asymmetries between the principal and...