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

Peng Huang (), Gaoyan Lyu () and Yi Xu ()
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Peng Huang: Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742
Gaoyan Lyu: School of Management and Economics, Beijing Institute of Technology, Beijing 100081, China
Yi Xu: Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742

Management Science, 2022, vol. 68, issue 6, 4415-4434

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 applications strategies render the platform owner better off, with higher profits, higher average quality, and a larger consumer network, but only subsidization always improves social welfare. In addition, the trade-off between subsidization and first-party applications strategies depends on the development cost of first-party applications and the fraction of high-quality complementors, but the relationship is not monotonic. Our results demonstrate that the platform does not have to sacrifice application quantity for higher application quality. With the right choices, 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-sided market; platform ecosystem; first-party application; quality threshold (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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