Seller Diversity in a Two-Sided Platform
Abstract
As two-sided markets flourish, platform owners face the problem of governing seller diversity. In this paper, we use the circular city model to study seller-side variety and quality heterogeneity and evaluate the platform’s governance strategy. An increase in variety improves matching of sellers’ products and buyers’ preferences; meanwhile, it alters competition among sellers, hence their pricing strategies. Interestingly, under certain conditions, an increase in variety may reduce consumer surplus as a result of sellers’ pricing strategies, which contrasts with the positive network effect discussed in the literature. The effect of variety on seller-side competition also suggests that it is optimal for the platform owner — who earns a share of sellers’ profits — to restrict variety within a threshold to mitigate competition intensity. We further incorporate quality heterogeneity in the circular city model and derive closed-form solution of the equilibrium outcome. The results show that quality heterogeneity leads to higher profits for the platform. Furthermore, rather than offering uniform support that increases the average quality, an effective strategy for the platform is to offer discriminatory support to sellers to enhance quality heterogeneity.