Monetizing Platforms: An Empirical Analysis of Supply and Demand Responses to Entry Costs in Two-Sided Markets

This study investigates the consequences of monetizing a marketplace for product promotion within a digital platform, specifically the Giveaways program on Goodreads.com. Using a natural experiment and fine-grained platform data from 2016 to 2020, we examine how introducing a fixed entry cost for content creators affected both supply and demand in this two-sided market. Our findings reveal significant shifts in marketplace dynamics after monetization: (1) a substantial decrease in overall program participation, particularly among indie publishers and self-published authors, leading to increased market concentration; (2) reduced genre diversity, with popular genres becoming more dominant at the expense of niche categories; and (3) intensified promotional effects, characterized by higher review volume but lower average ratings for participating books. Analysis of review text suggests an increase in consumer-book mismatches as a potential mechanism driving this outcome. Our study advances platform economics by demonstrating how entry costs reshape marketplace composition and affect value creation in two-sided markets. These findings inform platform design and policy, particularly for markets with horizontally differentiated products and heterogeneous consumer preferences. This paper was accepted by Anindya Ghose, information systems. Funding: Financial support from the Dutch national e-infrastructure [Grants 2024/ENW/01764012, EINF-1825, EINF-7628, and EINF-7946] and the European Union [Next Generation EU funds Component M4.C2, Investment 1.1—CUP J53D2300462] is gratefully acknowledged. Supplemental Material: The web appendix and data files are available at https://doi.org/10.1287/mnsc.2023.01390 .