Platform investment and seller competition in two-sided markets

Abstract Platforms can create value within their ecosystems through their investments. In this paper, we model a monopolistic platform choosing the level of a demand-enhancing investment and the membership fees that sellers and buyers pay to access the platform. We find that platform size and quality are large when the degree of product differentiation among sellers and investment productivity are high. Platform profit and users’ surplus are aligned. If the platform sells a product under its brand, incentives to invest are higher, compared to a pure marketplace, and sellers’ surplus can be larger if the degree of product differentiation is low.