Two-Sided Platforms: Product Variety and Pricing Structures

Abstract

lessThis paper provides a new modeling framework to analyze two-sided platforms connecting producers and consumers. In contrast to the existing literature, indirect network effects are determined endogenously, through consumers' taste for variety and producer competition. Three new aspects of platform pricing structures are derived. First, the optimal platform pricing structure shifts towards extracting more rents from producers relative to consumers when consumers have stronger demand for variety, since producers become less substitutable. With platform competition, consumer preferences for variety, producer market power, and producer economies of scale in multihoming also make platforms' price-cutting strategies on the consumer side effective. This second effect on equilibrium pricing structures goes in the opposite direction relative to the first one. Third, variable fees charged to producers can serve to trade off producer innovation incentives against the need to reduce a platform holdup problem.
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