Hybrid platforms with free entry: demand-enhancing activities

Abstract We study the decision of a platform as to the quantity and quality of the products to sell directly on its own marketplace, where also third-party sellers decide how much to invest in the quality of their products. Using a representative agent framework that is based on a quasi-linear quality-augmented indirect utility function, we show that, under free entry, the quality investments of sellers do not change with platform entry, while the number of joining sellers does. Moreover, contrarily to what is found in the received literature, the platform may go hybrid even in the case it does not enjoy a competitive advantage vis-á-vis third-party sellers. We then study the welfare implications of a platform’s entry decision and show that promoting sellers’ investments and/or contrasting platform entry may lead to a larger as well as a lower consumer welfare. This depends on the platform’s response in equilibrium, both in terms of changes of its quality-enhancing investments and the fee charged on the revenues of third-party sellers.