Navigating Trade-Offs: Platform Strategies in Two-Sided Markets with Negative Externalities

A two-sided marketplace with network effects, such as an online food delivery platform, faces challenges when buyers impose disutility on each other while competing for shared resources. To reduce this disutility, the platform can exercise greater control over transactions, charge sellers a higher transaction fee, or both, but these strategies have trade-offs. Using a game-theoretic model, we show that a market in our setting can be divided into two distinct types based on the relative strength of buyers’ same-side negative externality and cross-side positive network effect. Our study provides several interesting insights. 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 may decrease its effort despite an increase in buyers’ same-side negative externality in both types of markets. In either case, the platform’s profit is not necessarily hurt. Furthermore, transaction fee can decrease with an increase in the cross-side positive network effect.