EXPRESS: Strategizing Value-Added Services for Platform Firms

Platform firms are increasingly investing in value-added services (VAS), believing these investments in VAS universally contribute to their success. Although many studies have examined platform firms’ core services (e.g., intermediation), systematic analyses of VAS provision strategies remain limited. In this paper, we develop a game-theoretic model to analyze (1) the conditions under which platform firms benefit from providing VAS and (2) to which side(s) platform firms should provide VAS. We offer several insights. First, variable service costs are a critical yet previously neglected factor in governing platform firms’ VAS provision. Second, a comparison of equilibrium outcomes across three VAS provision strategies—one-sided unidirectional, two separate unidirectional, and bidirectional—reveals that the optimal strategy is jointly determined by variable service costs, cross-network externalities, and the asymmetry in the benefits of bidirectional VAS to the two platform sides. Specifically, when asymmetry is low, bidirectional VAS is optimal. When asymmetry is high, platform firms should provide unidirectional VAS to one side, considering the second side only when variable service costs are low or cross-network externalities are significant. Third, we explore the implications of VAS provision strategies for platform firms’ investment and pricing decisions. For example, when platform firms provide two separate unidirectional VAS, these investments are complementary. VAS could incentivize platform firms to offer price subsidies to one side of the platform. Finally, optimal VAS provision strategies do not always increase consumer surplus.