Dynamic Platform Competition: Optimal Pricing and Piggybacking Under Network Effects

Abstract

A repeated challenge of the two-sided market literature is the “chicken-and-egg” problem. In a single-period setting, subsidizing one side of the market to jumpstart the platform adoption process has been suggested as the solution. However, it is not known whether such subsidizing strategies remain optimal under dynamic platform competition. This paper develops a multi-period framework to study dynamic platform competition under cross-side network effects. First, we solve for the platforms’ optimal dynamic pricing strategies. Benchmarked with the single-period case, we identify regions when each competing platform should decrease prices, and more interestingly, when they should increase prices. Second, we study piggybacking as a new solution for the “chicken-and-egg” problem. We extend our baseline model to consider piggybacking, by introducing an initial installed base on the consumer side. We examine the asymmetric scenario when one piggybacking platform competes with another platform who does not piggyback. We then study optimal piggybacking strategies and examine the interaction effects among optimal pricing, optimal piggybacking, and network effects. Third, we extend our baseline model to consider platforms with asymmetric discount factors for their future profits. Practical implications are also discussed.