First-Party Content, Commitment and Coordination in Two-Sided Markets

by Andrei Hagiu and Daniel Spulber

Executive Summary — Two-sided platforms face a challenging coordination problem that consists of attracting both buyers and sellers. Participation by both depends on their expectations of participation on the other side of the market. To improve such coordination, many platforms provide "first-party content," such as games (e.g. Microsoft's Halo on Xbox), objective search results (Google and Bing) or, in the case of Amazon and eBay, product information and payment systems. First-party content makes participation more attractive to one side (typically, users), independently of the presence of sellers. Importantly, first-party content may be either a complement or a substitute for third-party sellers' products. For instance, Halo is a substitute for games provided by Electronic Arts on the Xbox; on the other hand, the Xbox Live online playing system is a complement. Similarly, Amazon's shipping services complements its third-party sellers' offerings, but the products Amazon sells under its own name compete with them. Professors Hagiu and Spulber examine the incentives that two-sided platforms have to invest in first-party content in order to coordinate adoption by both sides. The authors show that the incentives for firms to use first-party content depend crucially on the nature of buyers' and sellers' expectations and the relationship between first-party content and third-party seller participation (complements or substitutes). Key concepts include:

• The strategic use of first-party content by two-sided platforms depends in important ways on the relationship between first-party content and third-party seller participation.
• When first-party content is complementary to third-party sellers' products, a platform facing unfavorable expectations underinvests in first-party content relative to a platform benefiting from favorable expectations.
• On the other hand, when first-party content and seller participation are substitutes, the platform facing unfavorable expectations typically overinvests in first-party content.

 

Author Abstract

The strategic use of first-party content by two-sided platforms is driven by two key factors: the nature of buyer and seller expectations (favorable vs. unfavorable) and the nature of the relationship between first-party content and third-party content (complements or substitutes). As a result, first-party content is a strategic instrument that plays a dual role. On the one hand, it enables platforms facing unfavorable expectations to compensate for their difficulty in attracting third-party sellers. They should over-invest in first-party content that substitutes for third-party content relative to platforms benefitting from favorable expectations. On the other hand, platforms that benefit from favorable expectations capture a larger share of total surplus from buyers and sellers. They derive a higher return on investment in first-party content that complements third-party content relative to platforms facing unfavorable expectations. As a result, the latter under-invest in complementary first-party content. These results hold with both simultaneous and sequential entry of the two sides. With two competing platforms-incumbent facing favorable expectations and entrant facing unfavorable expectations-and singlehoming on one side of the market, the incumbent always invests (weakly) more in first-party content relative to the case in which it is a monopolist.


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