Two-Sided Pricing and Endogenous Network Effects

31 Pages Posted: 18 Apr 2014 Last revised: 21 Mar 2016

See all articles by Mei Lin

Mei Lin

Singapore Management University

Ruhai Wu

McMaster University - Michael G. DeGroote School of Business

Wen Zhou

University of Hong Kong

Date Written: March 15, 2016

Abstract

This paper examines a monopoly platform's two-sided pricing strategies in a setting with seller competition, which gives rise to not only positive cross-side network effects between buyers and sellers, but also a negative same-side network effect among sellers. We show that platform pricing depends crucially on the characteristics associated with the market as a whole (i.e., the two sides combined) rather than a comparison between the two sides' demand elasticities and/or network effects as suggested by existing studies. Regardless of originating from the buyer side, the seller side or both, changes in a parameter induce the platform to raise the buyer entry fee and lower the seller entry fee if and only if the parameter change directly increases the total surplus of the platform economy.

Keywords: Two-sided platforms, network effects, market liquidity, subsidy, product differentiation

JEL Classification: D40, L1

Suggested Citation

Lin, Mei and Wu, Ruhai and Zhou, Wen, Two-Sided Pricing and Endogenous Network Effects (March 15, 2016). Available at SSRN: https://ssrn.com/abstract=2426033 or http://dx.doi.org/10.2139/ssrn.2426033

Mei Lin (Contact Author)

Singapore Management University ( email )

80 Stamford Road
Singapore
Singapore

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

Ruhai Wu

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Wen Zhou

University of Hong Kong ( email )

1225 KKL Building
Pokfulam Road
Hong Kong
China

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