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Innovation and Policy Support for Two-Sided Market Platforms: Can Government Policy Makers and Executives Optimize Both Societal Value and Profits?

Author

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  • Dawoon Jung

    (Research Center for Smarter Supply Chain, Dongwu Business School, Soochow University, 215000 Jiangsu, China)

  • Byung Cho Kim

    (Department of Logistics, Service and Operations Management, Korea University Business School, Korea University, Seoul 136-701, Korea)

  • Myungsub Park

    (Department of Logistics, Service and Operations Management, Korea University Business School, Korea University, Seoul 136-701, Korea)

  • Detmar W. Straub

    (Institute for Business and Information Technology, Fox School of Business, Temple University, Philadelphia, PA 19122)

Abstract

Information technology (IT) can transform societies, governments, and businesses alike. Technological innovation requires difficult but critically important strategic decisions. Making good decisions becomes even more challenging for platforms tightly linked to network externalities that are inherent in two-sided markets. Inspired by the driverless car industry, which is now receiving green signals from available technology and government policies, this study introduces a model of competing IT platforms that use a complementary physical medium. The aim is to understand the possible incentives for technological innovation to inform decision makers from both industry and government. Although the existing literature on two-sided markets focuses on platform pricing strategies for network expansion, it pays little attention to decisions that involve high levels of innovation. For this reason, the study investigates how platforms can strike a balance between these two decision alternatives, namely price and improved quality from innovation. This study examines the conditions under which platforms receive incentives to innovate in the presence of network externalities. We also examine how equilibrium is influenced by technological asymmetry between the competing platforms, and consumers’ and service providers’ multihoming (i.e., choosing between multiple options) behavior. We extend focus to a government policy perspective by studying how to subsidize innovations. Three different policies are considered: (1) subsidies for consumers, (2) subsidies for service providers, and (3) innovation-based subsidies for platforms. The scholarly and practical implications of our findings are discussed.

Suggested Citation

  • Dawoon Jung & Byung Cho Kim & Myungsub Park & Detmar W. Straub, 2019. "Innovation and Policy Support for Two-Sided Market Platforms: Can Government Policy Makers and Executives Optimize Both Societal Value and Profits?," Information Systems Research, INFORMS, vol. 30(3), pages 1037-1050, September.
    • Handle: RePEc:inm:orisre:v:30:y:2019:i:3:p:1037-1050
    DOI: 10.1287/isre.2019.0851
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    2. Yingxiu Zhao & Sitong Zhou, 2023. "The Impact of Two-Sided Market Platforms on Participants’ Trading Strategies: An Evolutionary Game Analysis," Mathematics, MDPI, vol. 11(8), pages 1-18, April.
    3. Hou, Rui & Lei, Lei & Jin, Kangning & Lin, Xiaogang & Xiao, Lu, 2022. "Introducing electric vehicles? Impact of network effect on profits and social welfare," Energy, Elsevier, vol. 243(C).
    4. Zhuoning Zhang & Zhongsheng Hua, 2023. "Performance investment decision and pricing strategy for platforms considering two‐sided users' different preferences," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(4), pages 2457-2480, June.
    5. Hanspach, Philip, 2022. "Internet infrastructure and competition in digital markets," 31st European Regional ITS Conference, Gothenburg 2022: Reining in Digital Platforms? Challenging monopolies, promoting competition and developing regulatory regimes 265633, International Telecommunications Society (ITS).
    6. Shuilin Liu & Xudong Lin & Xiaoli Huang & Hanyang Luo & Sumin Yu, 2023. "Research on Service-Driven Benign Market with Platform Subsidy Strategy," Mathematics, MDPI, vol. 11(2), pages 1-21, January.
    7. Xingzhen Zhu & Markus Lang & Helmut Dietl, 2022. "Content Quality Assurance on Media Platforms with User-Generated Content," Working Papers 395, University of Zurich, Department of Business Administration (IBW).
    8. Reza-Gharehbagh, Raziyeh & Hafezalkotob, Ashkan & Makui, Ahmad & Sayadi, Mohammad Kazem, 2022. "Financing green technology development and role of digital platforms: Insourcing vs. outsourcing," Technology in Society, Elsevier, vol. 69(C).
    9. Zhu, Weijun & Xie, Jiaping & Xia, Yu & Wei, Lihong & Liang, Ling, 2023. "Getting more third-party participants on board: Optimal pricing and investment decisions in competitive platform ecosystems," European Journal of Operational Research, Elsevier, vol. 307(1), pages 177-192.
    10. Xiaoxi Zhu & Changhui Yang & Kai Liu & Rui Zhang & Qingquan Jiang, 2022. "Cooperation and decision making in a two-sided market motivated by the externality of a third-party social media platform," Annals of Operations Research, Springer, vol. 316(1), pages 117-142, September.
    11. Xie, Jiaping & Zhu, Weijun & Wei, Lihong & Liang, Ling, 2021. "Platform competition with partial multi-homing: When both same-side and cross-side network effects exist," International Journal of Production Economics, Elsevier, vol. 233(C).
    12. Yongyi Zhou & Yulin Zhang & Mark Goh, 2021. "Choice of pricing and advertising schemes for a two‐sided platform," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(7), pages 1865-1885, October.

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