Optimal product selection and pricing strategies for platform vendors under two-sided network effects

Abstract

Abstract This study investigates a platform’s decision on product-mix selection as well as its pricing strategy. We found that when a platform and third-party sellers offer different product mixes under a membership fee mechanism, the platform vendor should sell a low-end product mix in the following cases: (1) when the average profit ratio of a high-end to a low-end product mix is small and the network effect from sellers to consumers is weak, or (2) when the average profit ratio is large, the network effect from consumers to sellers is strong, and that from sellers to consumers is moderate. When third-party sellers are allowed to provide products in the same product mix as the platform’s and first-party products have a large competitive advantage, equilibrium outcomes, in which the platform and third-party sellers offer the same product mix, are more likely to occur. Furthermore, a commission fee mechanism outperforms a membership fee mechanism if the network effect from sellers to consumers is moderate. Finally, if a platform adopts a commission fee mechanism, third-party sellers are more incentivized to sell a product mix that differs from the platform’s.