Andrei HAGIU (Fellow, RIETI)
This paper contains two extensions of the modelling framework proposed by Hagiu (2004a) for studying two-sided market platforms. First, introducing vertical differentiation among both users and developers, we show that the optimal platform pricing structure continues to shift towards making a larger share of profits on developers relative to users when the latter have a stronger preference for product variety. Also, when developers are vertically differentiated, a two-sided proprietary platform may induce socially excessive product variety, a scenario which never occurs in the horizontal differentiation model. Second, we introduce developer investment in product quality and show that a two-sided proprietary platform may be more socially efficient than an open platform in terms of the product quality it induces, even when it is less efficient with respect to the level of product variety. In this context we also determine the profit-maximizing proportional variable fee charged by a proprietary platform to developers and show that it is is increasing in the degree of developer risk-aversion and is used by the platform to trade product variety for product quality when developers' marginal cost of quality provision increases.