Bilateral value-added service investment in platform competition with cross-side network effects under multihoming

Abstract

To expand users’ scale and enhance competitiveness, many third-party platforms have focused on investing in value-added service (VAS). This study focuses on bilateral VAS and pricing decisions of two competing platforms with different investment costs. Platforms’ bilateral users, including manufacturers and suppliers, can access one or two platforms (i.e., bilateral users can be multihomed). By developing a Hotelling model, we study the differences in VAS investment and pricing between two platforms considering cross-side network effects (CNEs) and propose the strategies of bilateral VAS and pricing for platforms. Then, compared to the situation of no VAS, we analyze the influence of VAS investment on platform pricing. The results show that unlike the platform with high marginal investing cost, the platform with low marginal investing cost offers a higher VAS level to its bilateral users, but may charge them less. Under some conditions, the platform with low marginal investing cost should provide a high level of VAS for manufacturers but charge them a low fee, and simultaneously provide a low level of VAS for suppliers but charge them a high fee. While the platform with high marginal investing cost should provide a high level of VAS with subsidies for manufacturers but a low level of VAS with charges for suppliers. Moreover, we also find that regardless of platforms’ marginal investing costs being high or low, they always charge suppliers more after investing in VAS, but may charge manufacturers less, or subsidize them more.