Fending off Critics of Platform Power with Differential Revenue Sharing: Doing Well by Doing Good?
Management Science, Forthcoming
28 Pages Posted: 2 Aug 2022
Date Written: July 26, 2022
Many digital platforms have accrued enormous power and scale, leveraging cross-side network effects between the sides they connect (e.g., producers and consumers; or creators and viewers). Platforms motivate a diverse spectrum of producers, large and small, to participate by sharing platform revenue with them, predominantly under a linear revenue-sharing scheme with the same commission rate regardless of producer power or size. Under pressure from society, lawsuits, and antitrust investigations, major platforms have announced revenue sharing designs that favor smaller businesses. We develop a model of platform economics, and show that a small-business oriented (SBO) differential revenue sharing design can increase total welfare and outputs on the platform. While smaller producers almost always benefit from the shift in revenue sharing design, spillover effects can also make large producers better off under some conditions. More interestingly, we show that platforms are the most likely winner under a differential revenue sharing scheme. Hence, an intervention that ostensibly offers concessions and generous treatment to producers might well be self-serving for platforms and also good for the entire ecosystem.
Keywords: Platform, revenue-sharing, platform regulation, ecosystem design
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