Platform Pricing and Investment to Drive Third Party Value Creation in Two-Sided Networks

53 Pages Posted: 27 Apr 2017  

Burcu Tan

Tulane University

Edward G. Anderson

University of Texas at Austin - Department of Information, Risk and Operations Management

Geoffrey Parker

Dartmouth College

Date Written: September 29, 2016

Abstract

Many two-sided platforms (e.g., eBay, Google, iOS, Android, Twitter, Amazon) provide integration tools, such as modular interfaces, interactive development environments, application programming interfaces (APIs), and help desks to reduce the costs and improve the functionality of third party content developed for the platform. The need for such investment is increasing with the rise of major new markets such as the Internet of Things. While crucial to platform success, platform integration tools are costly to create. We develop an analytic model to explore the key trade-offs behind investment in integration tools and how that investment interacts with pricing decisions in a two-sided market. We model these decisions under various scenarios including monopoly and competitive platforms as well as symmetric and asymmetric platforms. Our results suggest that the consideration of integration investment can push the market into regimes in which the standard pricing results from extant platform literature no longer hold, in particular the tendency to reduce prices to one side of a market in response to increasing benefit of the network to the other side. Moreover, integration investments must be well-coordinated with developer and consumer pricing decisions and may have to be revised dynamically as the platform gains traction in the market. Higher levels of investment into integration become desirable when the platform (1) faces favorable expectations, (2) has access to a high-quality developer community, and (3) operates in a market where developers earn a high profit margin creating content that is highly valued by the consumer market. Finally, we also discuss a number of policy implications of this work.

Keywords: Two-Sided Markets, Network Externality, API, Application Programming Interface, Developers, Integration, Ecosystem

JEL Classification: L1, M11, O32

Suggested Citation

Tan, Burcu and Anderson, Edward G. and Parker, Geoffrey, Platform Pricing and Investment to Drive Third Party Value Creation in Two-Sided Networks (September 29, 2016). Available at SSRN: https://ssrn.com/abstract=2959165 or http://dx.doi.org/10.2139/ssrn.2959165

Burcu Tan (Contact Author)

Tulane University ( email )

6823 St Charles Ave
New Orleans, LA 70118
United States

Edward G. Anderson

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States
512-471-6394 (Phone)
512-471-3937 (Fax)

Geoffrey Parker

Dartmouth College ( email )

Hanover, NH 03755
United States
603-646-9075 (Phone)

HOME PAGE: http://engineering.dartmouth.edu/people/faculty/geoffrey-parker

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