Multisided platforms are integral to the digital economy, connecting product or service providers (generally known as complementors) and consumers or users. These platforms thrive on “cross-side network effects”, where the platform’s value increases as more participants join and interact. However, the success of these platforms depends not only on the number of participants but also on the quality of their offerings and exchanges. In our article, published in the Journal of Management Studies, “Balancing Variety and Quality: Examining the Impact of Benefit-Linked Cross-Subsidization on Multisided Platforms”, we introduce a remedy for a vital trade-off that platforms face: maintaining various complementors and their offerings on the platform without sacrificing their quality. We show that a specific cross-subsidization pricing strategy—the benefit-linked pricing strategy—can potentially mitigate the tension between quality and variety. Despite a decrease in entry barriers for new complementors—prompted, in our case, by a new regulatory policy—we found that the platforms that used benefit-linked cross-subsidization were able to maintain the quality of complementors and their offerings and that they outperformed those that did not use such a pricing strategy.

The Variety vs. Quality Trade-Off

One major challenge that platforms face is balancing the need for a wide variety of offerings and, at the same time, maintaining their high quality. While having many options can attract more users, it can also decrease the quality of offerings if not adequately managed. This “variety versus quality trade-off” is a fundamental platform governance problem. For example, suppose a platform adopts a lax gatekeeping policy to attract more complementors. In that case, it might end up with many low-quality offerings, as seen with the infamous Atari shock in 1983 when a flood of poor-quality games led to the collapse of Atari’s market. Platforms can apply various strategies to preserve the quality of offerings, including monetary and non-monetary rewards, recommendation and rating systems, and certification badges to encourage high-quality contributions. However, these strategies are not always successful in balancing variety and quality. They can favour established complementors and make it harder for new entrants to compete, hence sacrificing variety for quality.

Benefit-Linked Cross-Subsidization to Balance Variety and Quality

Prior research has shown that platforms often use cross-subsidization pricing, lowering prices on one side to encourage more participation. This strategy increases the other side’s members’ willingness to pay, ultimately leading to higher platform profits. For example, shopping malls frequently offer free amenities to draw in consumers, thus generating income through merchant rent and royalties. Similarly, videogame consoles are often sold at a loss to consumers to attract gamers, with profits coming from royalties paid by game publishers.

In this article, we identify a specific pricing strategy (a “benefit-linked cross-subsidization”) that links subsidies to the value generated by complementors on the other side of the platform. We show this strategy can alleviate the variety versus quality trade-off. It does so by maintaining incumbent complementors’ incentives for quality and steering the platform’s entry dynamics toward high-quality complementors. The benefit-linked cross-subsidization strategy can sustain complementors’ quality contribution even in situations with reduced complementors’ entry barriers and increased inter-complementors’ competition. This pricing strategy can, therefore, mitigate the trade-off between variety and quality in multisided platforms, enabling platforms to maintain both the breadth and depth of complementors and their offerings.

Context and Findings

We tested this hypothesis using longitudinal data from airports. We considered airports multisided platforms, with airlines and passengers on one side and commercial concessionaires in terminals on the other. We found that the airports that used benefit-linked cross-subsidization could maintain high-quality offerings (i.e., maintain the traffic composition in favour of legacy airlines, which bring passengers who tend to spend more in airport shops) even after regulations mandated them to reduce barriers for new airlines to enter the airport. These airports also outperformed those that did not use such a strategy. Two interesting features of our context enabled us to test our hypotheses properly: first, the variation between the airports that applied benefit-linked cross-subsidization or those that did not; second, the variation between the airports that had to reduce airline entry barriers because of regulation and those that did not.

Key Implications

Rapid growth strategies that grant access to many platform participants can exacerbate the tension between variety and quality. Quality-enhancing strategies, recommended in prior studies, predominantly include non-pricing strategies, which often come at the cost of sacrificing variety. Despite the importance of pricing strategies for ensuring high-quality contributions, their quality implications have largely been overlooked. Our study advances this line of research by demonstrating that benefit-linked cross-subsidization can maintain the quality of contributions even when entry barriers are reduced, and competition among complementors increases. This strategy can be usefully applied as a complement to the strategy of less restrictive gatekeeping, as it steers entry dynamics toward high-quality complementors without restricting access.

Furthermore, benefit-linked cross-subsidization is not limited to our empirical context. Similar strategies are employed in other markets, such as Google and YouTube, when they reward content creators based on the value they generate for advertisers. Other examples include platforms in the videogame industry, as they often charge lower royalty fees to superstar publishers. Another important example is Apple implementing modified pricing strategies for subscription-based apps with high engagement and retention rates in its app store. Platform managers should consider the merits of benefit-linked cross-subsidization. Specifically, platforms that aim to capitalize on larger cross-side network externalities without undermining incentives for quality should adopt this pricing approach. This can be particularly relevant in the current regulatory context, where the European Union’s new Digital Markets Act aims to increase competition among platforms, for example, by requiring Apple to allow third-party app stores to be accessible from Apple devices. More app stores accessible from Apple devices will undoubtedly lead to an influx of app developers, thereby increasing competition among developers. Apple can mitigate the effect of increased competition by incentivizing quality through reduced royalties for high-quality apps based on user ratings and engagement.