Online-to-offline (O2O) services permeate our daily life and consumption along with the advanced technology in e-commerce. In this study, motivated by taxi-hailing market case, we analyze the effect of government regulations on competition in two-sided markets featured network externality under the O2O era. First, a model with Hotelling specification is formulated to describe the competition in taxi-hailing markets using subsides as decision variables. In the model, platforms subsidize two sides agents labeled drivers and passengers, and the subsidies are given based on whether a state of membership or every transaction. Second, government regulations are introduced into the model by adding corresponding modification into agents’ utility, and new consequent market equilibriums are compared with the benchmark status. Major findings of this work include: i) the effects of price adjustments regulation depend largely on relative size of mutual network externalities, which causes a negative impact on social welfare except for extreme size level; ii) butt joint with official platforms brings down platforms’ cost in both sides so that companies make more profits, where social welfare including consumer surplus and profits increases; iii) forbiddance setting in time limited usage scarifies a little economic effectiveness to ensure better safety.

Introduction

In recent years, the advanced mobile technology has led us into an online-to-offline (O2O) community, where the mobile payment technology plays an increasingly important role. O2O refers to an integration of offline commercial opportunities into online operation and services. An example of O2O is the popularity of taxi-hailing applications (apps), mobile software that matches drivers and passengers online to build offline connections. In addition, the advent of O2O has increasingly promoted transformation in many industrial sectors, most of which feature the characteristics of two-sided markets. Rather than going out to specific functional zones for services, customers now can enjoy services delivered to them at almost anytime and anywhere, so the way of bridging the supply chain from suppliers to customers has been changed (Xu et al., 2009; Wu et al., 2008; Wu et al., 2009). Various platforms are established to serve as intermediaries for ordering goods and service, e.g., clothing websites, online cosmetic retailers, and take-out delivery service. In all these cases, cross-group externalities exist, i.e., a platform connects two groups of agents and whether one group of agents attend and enjoy a platform or not relying on how the platform performs on attracting the other group of agents. For example, the take-out service platform will attract more customers if more restaurants would settle in. And restaurants are willing to participate into the platform if the platform shows its potential to have a large number of customers.