Two-Sided Pricing and Endogenous Network Effects
31 Pages Posted: 18 Apr 2014 Last revised: 21 Mar 2016
Date Written: March 15, 2016
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: Suggested Citation