Taxation of Digital Content in a Two-Sided Platform Marketplace

Abstract

Within a platform marketplace consumers purchase both the platform and platform content from independent sellers. For example, consumers purchase a smartphone from the platform developer and then purchase apps for their smartphones. Similarly, tablet owners purchase music, ebooks, apps, and videos for their tablets and console owners purchase video games to use on their consoles. The equilibrium within the exchange market between the consumers and content sellers affects the consumer elasticity of demand for the platform and the prices that the platform charges to consumers and sellers to join the platform. In many industries, digital content is not taxed while platform sales are taxed. I investigate the effects on the platform equilibrium and on social welfare from implementing taxes on the platform and on its content. The analysis reveals that under general distributions of consumer and seller types, the socially optimal tax policy is to subsidize participation and content sales as the platform does not account for the network externalities to the extent of a social planner.