Quality Regulation on Two-Sided Platforms: Exclusion, Subsidization, and First-Party Applications

Management Science, Forthcoming

43 Pages Posted: 18 Feb 2021 Last revised: 3 Jun 2021

See all articles by Peng Huang

Peng Huang

University of Maryland - Robert H. Smith School of Business

Gaoyan Lyu

Beijing Institute of Technology

Yi Xu

University of Maryland - Decision and Information Technologies Department

Date Written: November 27, 2020

Abstract

Managing the quality of complementary applications is vital to the success of a two-sided platform. While prior research has focused solely on restricting platform access based on a quality threshold, we compare three quality regulation strategies: 1) the platform excludes access to low-quality complementors, 2) it provides a fixed amount of subsidy to high-quality complementors, and 3) it develops its own high-quality applications in addition to those from third-party complementors. Our analyses reveal that the widely adopted exclusion strategy is a special case of the subsidization strategy, and it does not always benefit the platform. In contrast, both subsidization and first-party application strategies make the platform owner better off, with greater profits, higher average quality, and a larger consumer network size, but only subsidization always improves social welfare. In addition, the tradeoff between subsidization and first-party application strategies depends on the development cost of first-party applications, as well as the fraction of high-quality complementors, but the relationship is not monotonic. Interestingly, our results demonstrate that the platform does not have to sacrifice application quantity for higher application quality. With the right choice, it can profitably improve both measures simultaneously. This research provides concrete guidelines to help platform managers make decisions about regulating the quality of complementary applications.

Keywords: quality regulation, two-sidede platform, platform ecosystem, first-party application, quality threshold

Suggested Citation

Huang, Peng and Lyu, Gaoyan and Xu, Yi, Quality Regulation on Two-Sided Platforms: Exclusion, Subsidization, and First-Party Applications (November 27, 2020). Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3738426 or http://dx.doi.org/10.2139/ssrn.3738426

Peng Huang (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Gaoyan Lyu

Beijing Institute of Technology ( email )

5 South Zhongguancun street
Center for Energy and Environmental Policy Researc
Beijing, Haidian District 100081
China

Yi Xu

University of Maryland - Decision and Information Technologies Department ( email )

Robert H. Smith School of Business
4313 Van Munching Hall
College Park, MD 20815
United States

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