Innovation investment and subsidy strategy in two-sided market

This paper investigates two competitive strategies from two-sides of the e-commerce platform, that is, innovation investment on seller side and product subsidy investment on consumer side. We take competition intensity on seller side into account and analyze how consumer behaviors affect the platform’s strategy under three scenarios: (1) single purchase on single platform(S); (2) single purchase on multi-platforms(M); (3) repeat purchase on single platform (R). The results revel that the innovation investment for sellers is better off in S scenario. However, when the transfer cost is low, taking subsidy strategy is more profitable for the platform in R scenario. If the internal price competition is not sufficiently fierce, subsidy strategy is an efficient approach to reduce the price in M scenario. It is surprising that if the seller’s innovation capability is sufficiently high, the innovation investment strategy dominates no matter what consumer behaviors are. Moreover, how much the platform invests on the seller’s innovation is independent on the consumer’s behavior. These findings have practical managerial insights for the manager of platforms.