Platform Pricing with Strategic Buyers: The Impact of Future Production Cost

Production and Operations Management, Forthcoming

37 Pages Posted: 29 Dec 2013 Last revised: 8 May 2020

See all articles by Mei Lin

Mei Lin

Singapore Management University

Xiajun Amy Pan

University of Florida - Warrington College of Business Administration

Quan Zheng

University of Science and Technology of China - School of Management

Date Written: December 17, 2019

Abstract

Two-sided platforms are often coupled with exclusive hardware products that connect two sides of users, the consumers of the hardware product (i.e., buyers) and the application developers (i.e., sellers). The hardware product in the platform business model introduces three important issues that are not yet well understood in the literature of platform pricing: potentially downward-trending production cost, product quality improvements, and consumers' strategic behaviors. Using analytical modeling, our study explicitly factors in these issues in analyzing a monopoly platform owner's two-sided pricing problem. The platform sequentially introduces and prices quality-improving hardware products, for which the costliness of quality may decrease. Strategic buyers make purchasing and upgrading decisions, which dynamically determines the buyer-side network size. Meanwhile, the seller-side network size is determined endogenously. We find that, an increase in the likelihood or magnitude of future costliness reduction raises the initial buyer-side price of the low-quality product and lowers the seller-side fee. This strategy, in turn, creates an indirect intertemporal effect that allows the platform to also raise the buyer-side price(s) of the product(s) sold later. These findings contrast with conventional wisdom and provide an economic explanation for premium introductory pricing of many platform products. Moreover, we find that strengthening the network effect can result in more pronounced increases in the buyer-side prices.

Keywords: Dynamic pricing, two-sided platforms, sequential innovation, network effects, strategic consumers

JEL Classification: D9, L1, O3

Suggested Citation

Lin, Mei and Pan, Xiajun Amy and Zheng, Quan, Platform Pricing with Strategic Buyers: The Impact of Future Production Cost (December 17, 2019). Production and Operations Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2372461 or http://dx.doi.org/10.2139/ssrn.2372461

Mei Lin

Singapore Management University ( email )

80 Stamford Road
Singapore
Singapore

HOME PAGE: http://www.mysmu.edu/faculty/mlin/

Xiajun Amy Pan

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

Quan Zheng (Contact Author)

University of Science and Technology of China - School of Management ( email )

Hefei, Anhui
China

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