Platform pricing with endogenous network effects

• Main Authors: LIN, Mei, WU, Ruhai, ZHOU, Wen
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2014
• Subjects: Two-sided platforms; subsidy; variety; quality; network effects; vertical differentiation; Computer Sciences; E-Commerce; Management Information Systems
• Online Access: https://ink.library.smu.edu.sg/sis_research/3737; https://ink.library.smu.edu.sg/context/sis_research/article/4739/viewcontent/PlatformPricingEndoNetworkEff_2014.pdf
• Institution: Singapore Management University

This paper examines a monopoly platform’s two-sided pricing strategy through modeling the trades between the participating sellers and buyers. In this approach, the network effects emerge endogenously through the equilibrium trading strategies of the two sides. We show that platform pricing depends crucially on the characteristics associated with market liquidity, including both sides’ entry costs, the buyers’ preferences, and the distribution of the sellers’ quality. The platform may subsidize sellers if the market is sufficiently liquid, whereas buyer subsidy can be optimal given an illiquid market. We also illustrate the impact of the sellers’ quality heterogeneity on the platform’s optimal fees and the two sides’ entry scales. These findings provide guidance for platform pricing based on specific market and user characteristics, which are directly applicable to managerial decisions and deepen theoretical understanding of two-sided platforms.