A Platform's Dilemma in Controlling Marketplace Transactions

We study a two-sided marketplace with network effects, where buyers face congestion as they compete for the same resources the platform provides. To ease this congestion, the platform can exercise greater control on the marketplace or use pricing as a lever to limit the market size, thus containing the negative effect of congestion. However, this decision is not straightforward, as control is costly, and pricing can have unintended consequences. Using a game-theoretic model, we find a market in our setting can be characterized into two distinct categories based on the relative strength of buyers’ same-side negative externality and cross-side positive network effect. This categorization helps platforms design tailor-made strategies based on the type of market it operates. Our study reveals several interesting theoretical findings. First, when buyers face relatively weak same-side negative externality, the platform can exert more effort to improve their experience even when effort becomes costlier. Second, it can decrease its efforts despite an increase in buyers’ same-side negative externality. In either case, the platform profit is not necessarily hurt. We further find that the platform can also lower its transaction fees even when the strength of the cross-side positive network effect increases.