A theoretical analysis on two-sided duopoly platforms and tax regimes

Abstract

We study the effects of three forms of taxation—a tax levied on the platform's revenue, an ad valorem tax on consumers' access fees and tax imposed on per-transaction fees of sellers, in vertically differentiated two-sided duopoly platforms with cross-side network effects. The level of informative advertising which increases the probability of finding sellers by buyers, declines with taxes for each platform. Analytical comparison between tax regimes has been made. Additionally, for an increased degree of cross-group externality, platforms raise the level of informative advertising irrespective of tax structures.