Digital business models and quality investment

Marie-Laure Allain (), Marc Bourreau () and Pierre-François Darlas
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Marie-Laure Allain: CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - GENES - Groupe des Écoles Nationales d'Économie et Statistique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - GENES - Groupe des Écoles Nationales d'Économie et Statistique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique
Marc Bourreau: SES - Département Sciences Economiques et Sociales - Télécom Paris - IMT - Institut Mines-Télécom [Paris] - IP Paris - Institut Polytechnique de Paris, ECOGE - Economie Gestion - I3 SES - Institut interdisciplinaire de l’innovation de Telecom Paris - Télécom Paris - IMT - Institut Mines-Télécom [Paris] - IP Paris - Institut Polytechnique de Paris - I3 - Institut interdisciplinaire de l’innovation - CNRS - Centre National de la Recherche Scientifique
Pierre-François Darlas: CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - GENES - Groupe des Écoles Nationales d'Économie et Statistique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - GENES - Groupe des Écoles Nationales d'Économie et Statistique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique

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Abstract: In this paper, we study the competition between two horizontally differentiated digital platforms. Each platform can adopt either a \emph{user-funded} or an \emph{ad-funded} business model. The platforms also invest in service quality to attract users. We find that which business model is more conducive to quality investment depends on the relative value of the platforms' services to the marginal multi-homing user compared to the value of the marginal user to advertisers. From a consumer welfare perspective, in equilibrium, platforms tend to adopt the user-funded business model too often and insufficiently differentiate their business models. Our results also show that regulatory interventions in digital markets aiming at mitigating market power of ad-tech firms or improving privacy protection can induce shifts in business models, with potentially ambiguous effects on consumer welfare.

Keywords: Platform; two-sided markets; business model; quality investment (search for similar items in EconPapers)
Date: 2025-12
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Published in International Journal of Industrial Organization, 2025, 103, pp.103204. ⟨10.1016/j.ijindorg.2025.103204⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05391762

DOI: 10.1016/j.ijindorg.2025.103204

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