Abstract:

We provide a unified framework to study whether and when a digital platform is motivated to adopt a (price and non-price) instrument. Using a  micro-foundation of transactions among users (typically, buyers and sellers), we allow network effects to emerge endogenously from the transactions among users. Our model shows (i) negative within-group network effects and positive cross-group network effects exist on both sides of the market, and their magnitude are jointly determined by the participation on both sides; (ii) platform can achieve the highest profit only when it has sufficient price instruments to achieve optimal participation by both sellers and buyers. Namely, the platform must provide subsidies to buyers while charging sellers; (iii) Once the platform reaches optimal participation, any additional price instrument does not enable it to achieve higher profits; (iv) the adoption of a non-price instrument depends not only on how much it affects the product value and product price but also on the platform’s available price instrument(s).

For further information, please contact giovanna.tramontano@unibocconi.it or sara.picciallo@unibocconi.it