Seller competition on two-sided platforms

Abstract

Two-sided platforms connect two or more distinct user groups. Agents on such a platform not only value the participation of users from a different group but are also affected by the same-side network effects that arise from the participation of agents in their own group. We study how negative same-side network effects among sellers affect the participation levels and profit of a monopoly platform. We use a novel specification of the CES utility function to model our consumer preferences, where taste for variety and substitutability are not interrelated. We find that when the platform implements subscription pricing on both sides, an increase in the intensity of competition (higher negative same-side network effects) amongst sellers leads to more participation from both buyers and sellers and there is an increase in the profit of the platform. On the other hand, when the platform can only charge a fee from the seller, participation on both sides first rises and then falls. The platform’s profit also follows the same trend. We also briefly discuss how prices of competing platforms change when there is an increase in the intensity of competition amongst sellers.