Liver injury modulates local microenvironment, triggering production of signals that instruct stem cell fate choices. In this study, we employed a microfluidic co-culture system to recreate important interactions in the liver stem cell niche, those between adult hepatocytes and liver progenitor cells (LPCs). We demonstrate that pluripotent stem cell-derived LPCs choose hepatic fate when cultured next to healthy hepatocytes but begin biliary differentiation program when co-cultured with injured hepatocytes. We connect this fate selection to skewing in production of hepatocyte growth factor (HGF) and transforming growth factor (TGF)-β1 caused by injury. Significantly, biliary fate selection of LPCs was not observed in the absence of hepatocytes nor did it happen in the presence of TGF-β inhibitors. Our study demonstrates that microfluidic culture systems may offer an interesting new tool for dissecting cellular interactions leading to aberrant stem cell differentiation during injury.