Multi-sided platforms

- We study whether firms will want to become multi-sided platforms.
- This leads to a new definition of multi-sided platforms (MSPs).
- We provide a model of a firm's choice between a vertically integrated and MSP mode.
- The model reveals key tradeoffs between these different business models.
- The results apply to markets for professional services.

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.