The effectiveness of certification services on e-commerce platforms considering network externalities

Abstract

The fees of different certification services are charged in different ways: For example, T-mall.com (one of the leading e-commerce platforms in China) uses a total certification service, where each type of seller participating in the platform must purchase certification services; Pinduoduo.com (another Chinese e-commerce platform) uses an alternative certification service, where after paying a transaction fee, each seller participating in the platform can choose whether to purchase certification services. This paper studies how the choice of certification services affects the participation decisions of both sellers and buyers, as well as the revenue and quality level (the proportion of high-quality sellers of all participating sellers) of a platform. According to previous research, network externalities also affect sellers’ and buyers’ participation strategies. Studies on the effectiveness of different certification services for e-commerce platforms have rarely considered both positive and negative network externalities. The results of constructed game-theoretic models show that both the certification capability and the certification cost play critical roles in determining which certification services can generate more revenue. If a platform provides certification services, the total certification service always generates a higher quality level than the alternative certification service. Furthermore, the applicable scope of certification services (defined as the certification strategy space), can be broadened by increasing both the profit ratio (the ratio between the profit of H-type sellers and L-type sellers) and the value ratio (the ratio between the value of H-type sellers and L-type sellers). Counterintuitively, a higher certification capability does not always yield a higher certification fee.