Competition Between Two-Sided Platforms With Quality-Based Subsidization

ABSTRACT

We study platform competition in two-sided markets, where consumers value not only the number of providers on the other side of platforms but also their quality. In this context, enhancing provider quality is critical in the competition, and platforms may incentivize high-quality providers to join the platforms with a subsidy. The article examines a two-stage competition game between two platforms who decide their quality-based subsidization strategy and access fees charged to both sides of the platforms. We derive the equilibrium outcomes of the two competing platforms under different subsidization strategy scenarios, and provide insights on the impact of subsidization on platforms’ pricing, network sizes, quality, profits, and social welfare in a competitive setting. Our study shows that in competitive environment, subsidization is a double-edged sword that can lead to a prisoner’s dilemma for platforms, despite quality improvement. We also find that while subsidization has a positive quality effect that always increases consumer surplus, it may hurt provider surplus if the same-side competition effect among providers is too strong, which negatively affects provider surplus and may drive out low-quality providers under subsidization. As a consequence, the total social welfare also hinges on the provider side competition intensity.

KEY WORDS AND PHRASES:

• Online platforms
• platform competition
• network effects
• online subsidization
• game theory

Acknowledgments

The authors thank Prof. Vladimir Zwass (Editor-in-Chief) and the three anonymous referees for their constructive comments and suggestion. This work is supported in part by the University of Macau (grant no. MYRG2020-00256-FBA).

Disclosure Statement

No potential conflict of interest was reported by the authors.

Supplemental data

Supplemental data for this article can be accessed online at https://doi.org/10.1080/10864415.2022.2123648

Notes

¹ https://newsroom.tiktok.com/en-gb/tiktok-creator-fund-your-questions-answered

² https://www.geeky-gadgets.com/silver-rain-games-12-03-2021/?nowprocket=1

³ https://www.engadget.com/tiktok-facebook-instagram-reels-144511574.html

⁴ https://www.reuters.com/article/us-pinduoduo-results-idUSKBN1XU17Q

Additional information

Notes on contributors

Qi Fu

Qi Fu ([email protected]) is an associate professor of decision sciences in the Faculty of Business Administration, University of Macau. She received her Ph.D. from the Hong Kong University of Science and Technology. Dr. Fu’s research interests include operations and supply chain management, two-sided platforms, and robust optimization. Her papers have been published in such journals as Operations Research, Production, Operations Management, and European Journal of Operational Research.

Gaoyan Lyu

Gaoyan Lyu ([email protected]; corresponding author) is an assistant professor in the School of Management and Economics, Beijing Institute of Technology. She received her Ph.D. from Peking University, China. Her research interests include online platforms, two-sided markets, and supply chain management. Her papers have been published in such journals as Management Science and International Journal of Production Economics.