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Digital business models and quality investment

Author

Listed:
  • Marie-Laure Allain

    (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - Groupe ENSAE-ENSAI - Groupe des Écoles Nationales d'Économie et Statistique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - Groupe ENSAE-ENSAI - Groupe des Écoles Nationales d'Économie et Statistique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique)

  • Marc Bourreau

    (SES - Département Sciences Economiques et Sociales - Télécom Paris - IMT - Institut Mines-Télécom [Paris] - IP Paris - Institut Polytechnique de Paris, ECOGE - Economie Gestion - I3 SES - Institut interdisciplinaire de l’innovation de Telecom Paris - Télécom Paris - IMT - Institut Mines-Télécom [Paris] - IP Paris - Institut Polytechnique de Paris - I3 - Institut interdisciplinaire de l’innovation - CNRS - Centre National de la Recherche Scientifique)

  • Pierre-François Darlas

    (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - Groupe ENSAE-ENSAI - Groupe des Écoles Nationales d'Économie et Statistique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - Groupe ENSAE-ENSAI - Groupe des Écoles Nationales d'Économie et Statistique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique)

Abstract

In this paper, we study the competition between two horizontally differentiated digital platforms. Each platform can adopt either a \emph{user-funded} or an \emph{ad-funded} business model. The platforms also invest in service quality to attract users. We find that which business model is more conducive to quality investment depends on the relative value of the platforms' services to the marginal multi-homing user compared to the value of the marginal user to advertisers. From a consumer welfare perspective, in equilibrium, platforms tend to adopt the user-funded business model too often and insufficiently differentiate their business models. Our results also show that regulatory interventions in digital markets aiming at mitigating market power of ad-tech firms or improving privacy protection can induce shifts in business models, with potentially ambiguous effects on consumer welfare.

Suggested Citation

  • Marie-Laure Allain & Marc Bourreau & Pierre-François Darlas, 2025. "Digital business models and quality investment," Post-Print hal-05391762, HAL.
    • Handle: RePEc:hal:journl:hal-05391762
    DOI: 10.1016/j.ijindorg.2025.103204
    Note: View the original document on HAL open archive server: https://hal.science/hal-05391762v1
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    Keywords

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    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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