Subsidization and service enhancement: Which benefits the two-sided platform?

The top two-sided platform usually implements subsidization and service enhancement strategies to bolster user participation, however, these strategies’ performances remain unclear. This study examines the effectiveness of subsidization and service enhancement strategies on user participation and profitability. Our analysis reveals some intriguing findings. First, the subsidization may increase new user’s subscription price if the indirect network effect on new user side (i.e., the marginal utility from new user’s interaction with a developer) is lower than that on existing user side, despite high subsidy amount potentially generates user rewards. Second, the optimal subsidy amount follows an inverted-U relationship with average indirect network effect on user side, and excessive subsidy amount may trigger profit erosion. The optimal service effort always increases with average indirect network effect on user side, which empowers the two-sided platform to strategically intensify service enhancement as a catalyst for user acquisition. Besides, the service enhancement outperforms the subsidization in platform ecosystem (i.e., the network formed by users and developers) expansion only when the direct network effect (i.e., the marginal utility of interactions between same side users) reaches critical intensity, otherwise the subsidization remains dominant. Our findings identify threshold conditions for strategy selection, demonstrating how the monopoly two-sided platform leverages network effects to improve user engagement and profitability.