Freedom is Not Free: Platform Homing Policy and User Participation in Two-Sided Markets

Pricing and non-pricing differentiation are often jointly used in the platform economy, yet prior research has largely focused on each strategy individually rather than jointly. Our study aims to bridge the gap in current research by examining the interplay between platform pricing and non-pricing differentiation strategies, considering the impact of platform homing policies and asymmetrical network effects. We developed a stylized game-theoretical model to study pricing decisions and user loyalty, which account for various non-pricing (i.e., service) settings and platform homing policies that impact user freedom. Our study generates two insights. First, freedom of platform participation comes at a cost. We demonstrate that platforms can apply two distinct strategies to maximize gains: pay-for-freedom and freedom-premium. Depending on the specific network effect, platforms may choose to charge users for their freedom to participate on multiple platforms concurrently, or they may opt to subsidize users when restricting their freedom. Second, service levels can significantly affect user participation incentives and loyalty, suggesting that platforms can better manage customer relationships by setting an appropriate service level. In particular, while an increase in the service level can increase the number of user participants, there are conflicting interside interplatform spillover effects and opposite interside intraplatform effects on user loyalty at different levels of user freedom.