Quality Differentiation and Optimal Pricing Strategy in Multi-sided Markets
34 Pages Posted: 5 Aug 2020
Date Written: August 5, 2020
This paper analyzes the generalized quality differentiation model in multi-sided markets with positive externalities, which leads to new insights into the optimal pricing structure of the firm. We find that quality differentiation for users on one side leads to a decrease in the price charged to users on the other side due to cross-subsidization, thereby affecting the pricing structure of multi-sided firms. In addition, quality differentiation affects the strategic relationships among the choice variables for the platform, so that the platform strategically uses quality differentiation to raise its profits.
Keywords: Multi-sided Market; Quality Differentiation; Platform Business Strategies
JEL Classification: D43; L11; L42
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