Platform Dynamics and Economic Development

Abstract

We build a novel dynamic model of two-sided markets which can be used to explore both intertemporal and cross-side pricing strategies of platform enterprise. This two-period model goes beyond the traditional two-sided market framework to examine the new intertemporal tradeoffs that a platform enterprise faces when formulating differentiating prices over time for different sides. With this dynamic framework, we analyze a new phenomenon of economic development, emerging Digital Villages in China, which obtain initial subsidies from e-commerce platform enterprises like Alibaba for their low-income dwellers as sellers. After these low-income sellers become more capable of running the online business through learning-by-doing, the e-commerce platform will charge them a higher fee. Recently, the economic growth of these Digital Villages has been phenomenal. Theoretical results based on our dynamic model indicate, if third-degree price discrimination between new and old online sellers in period 2 is allowed, the platform will charge sellers a lower fee in period 1 compared with the later period. Furthermore, when the cross-side network externality of each online seller is stronger than that of each online buyer or the learning-by-doing benefit each online seller obtains is high enough, the platform will provide subsidies for sellers in the first period. Moreover, some dynamic pricing strategies will change if this price discrimination on sellers is prohibited. Finally, we examine the effects of the price regulation on the member fees to heterogeneous groups as well as social welfare regarding the two-sided markets behind the Digital Villages within this new theoretical framework.