If Platforms Are Exploiting Producers, Is Platform Competition the Solution?

If Platforms Are Exploiting Producers, Is Platform Competition the Solution?

Xingyue (Luna) Zhang

University of Washington Tacoma

Kitty Wang

University of Houston - C.T. Bauer College of Business

Hemant K. Bhargava

University of California, Davis

Abstract

Digital platforms enable third-party producers and workers to create and sell digital and non-digital products and services. High commissions charged by the platforms (implying that less is shared with the producers) have raised public and antitrust concerns. Economic theories profess the benefits of industry competition, yet we observe several platform industries where thriving competition has failed to yield a greater share of the surplus to the platforms' partners. We develop a model of platform competition to understand how it affects the platform ecosystem. We find that a higher degree of competition can decrease producer participation and the revenue sharing rate (as opposed to popular belief) because competition fails to expand the market significantly and can cause producers to spread higher costs across smaller markets (and lower revenues). This counter-intuitive outcome occurs even when there are no added benefits and costs associated with platform competition: competition's effect on one side of the market (lowering prices to the consumers) can reduce revenue platforms generate and share with the producers, making it marginally less attractive for producers to participate. We show that in addition to the revenue sharing rate, producer participation is a meaningful metric for evaluating the overall health of the platform ecosystem: even when revenue share increases, producer participation alongside producer profits can decrease. This does not mean platform competition is always detrimental. However, when competition does improve producer profits by increasing overall ecosystem revenue, most of the welfare gain can go to the platforms instead of the producers.