How social communications affect product line design in the platform economy

The booming platform economy has made it very convenient for consumers to communicate with each other through social media whenever and wherever they want. As industry and academia have repeatedly confirmed, such social communications are now significantly changing firms' business and management practices. This paper studies how social communications affect an upstream firm's product line design in the platform economy when an online platform makes strategic contract choices. We show that for both wholesale and agency contracts, social communications increase the product line length while decreasing the product price and quality. We also identify the conditions under which social communications provide a firm with fewer incentives for product line extension under a wholesale contract than under an agency contract. On the platform side, we show that an agency contract can be preferred in the presence of social communications over a wholesale contract if and only if the commission rate is sufficiently high or both the commission rate and the product line extension fee are moderate.