Enabling Versus Controlling
August 7, 2015 Editor 0
by Andrei Hagiu and Julian Wright
Executive Summary —
Widespread adoption of Internet and mobile technologies has made it possible to build marketplaces and platforms for a rapidly increasing variety of services, from house cleaning to programming, consulting and legal advice. Highlighting the tradeoffs, this paper studies a firm’s choice between two modes of organization—a traditional mode versus a platform mode—where the key difference between the two modes is that professionals hold more control rights over service provision in the platform mode than in the traditional mode.
In an increasing number of industries, firms choose how much control to give professionals over the provision of their services to clients. We study the tradeoffs that arise in choosing between a traditional mode (where the firm takes control of service provision) and a platform mode (where professionals retain control over service provision). The choice of mode is determined by the need to balance two-sided moral hazard problems arising from investments that only professionals can make and investments that only the firm can make, while at the same time minimizing distortions in decisions that either party could make (e.g., promotion and marketing of professionals’ services, price setting, choice of service offering, etc.).
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