Consumer welfare in the platform Economy: The role of desirable product quality

Abstract

Digital technologies have driven the growth of the platform economy, reshaping consumer behavior and significantly impacting consumer welfare. This paper constructs a nonlinear programming model with inequality constraints, aiming to maximize consumer welfare while considering the constraint imposed by consumer budgets. Notably, quality—an important factor for consumers—is incorporated into the utility function to explore its role in enhancing consumer welfare within the platform economy. The results indicate that as product quality variety increases, consumers can access products of more desirable quality, thereby improving consumer welfare. We further analyze consumers’ optimal purchasing strategies across different income levels. Our results reveal a counterintuitive phenomenon, when the income elastic demand, an income increase prompts consumers to favor a strategy characterized by increasing quantity while reducing quality. Lower but desirable quality may contribute more to consumer welfare than the highest quality as income levels increase, which challenges the prevailing assumption that higher income invariably leads to the purchase of higher-quality products. Finally, an empirical study using a panel dataset of actual transaction observations of wash products — a subcategory under Beauty & Personal Care — on Amazon over the past two years, with 32,000 transactions, employing linear regression analysis, confirms that the significant role of desirable quality in enhancing consumer welfare. These findings not only yield valuable insights for policymakers in advancing the diversification of product quality within the digital economy but also serve as a critical reference for consumers in making informed purchasing decisions to improve their welfare.