The impact of strategic agents in two-sided markets

This paper introduces strategic agents into a two-sided market. We model strategic agents as advertisers who can invest in ad quality, which in turn affects readers, platforms and themselves. When platforms can choose prices on both the reader side and the advertiser side, strategic agents intensify competition, leading to lower prices and profits for the platforms. However, when prices on the reader side are restricted to be zero, equilibrium prices on the advertiser side can be higher or lower under strategic agents. We also investigate the interplay between strategic agents and platform asymmetry, and analyze platforms’ incentive to invest in content quality. Our results suggest that strategic agents increase the degree of platform asymmetry and make it harder for the disadvantaged platform to compete. However, strategic agents may raise or lower platforms’ incentive to invest in content quality.