Platform Regulation on Seller Heterogeneity

On a “marketplace” platform, where two sides of users trade, the platform owner has an incentive to regulate its marketplace for a higher profit. This study focuses on a monopoly platform’s nonpricing, regulatory strategies in governing quality heterogeneity of competing sellers. In contrast to related studies, we endogenize strategic interactions among platform users. Our model extends the circular city model to capture seller heterogeneity in both variety and quality. The closed-form equilibrium solution reveals a ripple effect that exerts competitive pressure from seller to seller at a diminishing magnitude. The equilibrium analysis enables us to connect the economic mechanisms in users’ trading strategies with the platform’s regulatory problem. We find that the platform does not benefit from an equal support to all sellers that increases the average quality. Instead, the platform owner is better off providing discriminatory support in favor of higher-quality sellers to enhance quality heterogeneity. Moreover, the optimal quality support rate is lower for a higher average of seller quality because quality support is more costly; on the other hand, a higher variance make quality levels more responsive to discriminatory support and leads to a higher support rate. A higher transportation cost for buyers diminishes the optimal support rate because quality support is less effective when sellers are more differentiated. Lastly, we also consider non-competitive equilibria of the circular city model to discuss the feasibility of the competitive case.