Subsidization or Innovation? Retailing Strategies on Two-sided Market

Abstract

Effective consumer quality management is critical for two-sided platforms to thrive. While existing literature has primarily focused on seller-side quality thresholds to restrict platform access, this study explores two consumer-centric strategies: 1) fixed subsidy allocation (both homogeneous and heterogeneous) and 2) innovative service provision (homogeneous and heterogeneous). Our analysis reveals that subsidy strategies do not universally benefit platforms — their effectiveness depends critically on network effects. In contrast, innovation strategies consistently yield positive outcomes, driving higher platform profits, increased transaction fees, and expanded network size. A key finding is that under homogeneous innovation, the platform’s transaction fee remains invariant to consumer innovation preferences. Moreover, the optimal choice between subsidies and innovation hinges on both consumer innovation preferences and bilateral network effects. This research offers actionable insights for platform managers, demonstrating how to enhance performance metrics without compromising profitability. Our findings provide concrete guidelines for strategic decision-making in consumer quality management, bridging theory and practice in platform governance.

Keywords

Media platforms / two-sided markets / content provision / advertising intensity / product differentiation

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Systems Engineering Society of China and Springer-Verlag GmbH Germany