CSR investment for a two-sided platform: Network externality and risk aversion

Abstract

The business of two-sided platforms, such as those used for online ride-sharing, has expanded rapidly thanks to opportunities to efficiently match supply- and demand-side users. However, the development of these platforms faces the challenge of complying with corporate social responsibility (CSR) regulations, particularly on the supply side of two-sided platforms. How to improve CSR investment, in order to reduce CSR violations while ensuring profitability, is now an important question. In this paper, we develop a game-theoretic model for a two-sided platform and analyze the impacts of network externalities (including customer network externality and provider network externality) and risk aversion on CSR investment decision-making. The analytical results show that, contrary to our intuition, greater network externalities do not necessarily stimulate the platform to invest in CSR. When the strength of customer network externality is high, investment in CSR may have a “dilution effect”, i.e., CSR investment may reduce the platform's number of users and profit. Conversely, risk aversion always has an “incentive effect” on CSR investment, thereby increasing the platform's willingness to invest in CSR. Second, both provider and customer network externalities will increase the platform's prices. Interestingly, when the strength of customer network externality is high, the platform attracts more customers, even at high prices. Finally, our analysis indicates that risk aversion may reduce customer surplus when the strength of customer network externality is high. This result contradicts the initial expectation that risk aversion inspires platforms to invest in CSR, thereby improving customer utility and customer surplus.