Endogenous Network Effects, Platform Pricing and Market Liquidity
Year: 2015
Type: report
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 eects between buyers and sellers, but also a negative same-side network eect among sellers. We show that platform pricing depends crucially on the characteristics associated with market liquidity, which contrasts with the previous studies that point to the two sides’ relative demand elasticities and/or network eects. A market is said to be more liquid when it has less friction, resulting in a larger total surplus for the platform economy and hence greater equilibrium entry on both sides. We nd that in response to higher market liquidity, the platform raises the buyer entry fee and lowers the seller entry fee. The platform’s subsidy strategy is consistent: market liquidity is conducive to seller subsidy but hinders buyer subsidy.
Language: English
Subfield: Strategy and Management
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2190345384