Optimal platform pricing with multi-sided users: A direct and indirect network approach

Abstract

We challenge the dichotomy of network effects and highlight that they are not an exogenous characteristic of networks, but endogenous to the decisions of network users. When users choose which activities to perform in a network, multi-activity users transform indirect into direct network effects and a network effectively becomes one-sided if merely multi-activity users frequent it. Our work contributes to theory by determining the underlying primitives that produce what the literature calls a two-sided market and by highlighting how the standard two-sided pricing results are indeed optimal only under very specific conditions. Our work also reveals that platform design choices that impact multi-activity, potentially to over come the chicken-and-egg problem, will also impact optimal pricing. Lastly, we also contribute to estimation by illustrating how the presence of multi-active users can challenge identification in network industries.