Events

Dr. Brian Wu
Associate Professor of Strategy
Stephen M. Ross School of Business
University of Michigan

Using market-frictions based logic, we develop an analytical model that examines how online platforms can govern opportunistic behavior of offline service providers, thus allowing market forces to promote the general welfare. Empowered by information technologies, online platforms enable service providers to offer customized services that consumers have increasingly desired. Along with its tremendous value-creation potential, offering customized services encourages greater opportunism from the service providers. While reputation-based mechanisms have been proposed to foster trust, their effectiveness may be limited by excessive competition. To address this problem, we propose a novel platform design where the platform may induce a welfare-enhancing equilibrium where (i) the service providers on the platform enjoy higher capacity utilization than those outside and are motivated to exert effort by future concerns, and (ii) customers prefer service providers on the platform and are willing to pay a premium. Further, we evaluate the implications of our proposed approach on platform profitability by comparing different payment schemes, and generalize the model regarding imperfect monitoring signals and the entry and exit of service providers. Our work sheds new light on how platform design can help reduce market frictions in economic exchanges and potentially shape the evolution of industries.