Platform, Meet Apps: Pricing and Quality Under Cross-Sided Externalities

Abstract

Our study is motivated by the observation that two-sided platforms often exercise control on access to and transactions on at least one side of the market. For example, Apple's rigorous approval process and recent policies that prohibit cross-platform app-building tools is an indication of imposing control on both access and quality of its app market. Extant literature on two-sided markets fails to accommodate platform’s interventions on participation by either side (i.e. consumers and sellers of complementary products) of the market because it typically focuses on a homogeneous population. Our work aims to bridge this gap and provides the underlying rationale for the platform firm’s governance structure and optimal pricing decisions.