Abstract
The use of a price discrimination strategy is an important tool in competition. It can hurt firms and benefit consumers in a one-sided market. However, in two-sided markets, its primary goal is to attract more agents or increase profits. Here, the performance of a second-degree price discrimination strategy in the context of duopoly two-sided platforms is analysed. Two exogenous variables, which include the discount rate and the price discrimination threshold, are used in order to examine whether the price discrimination strategy could help two-sided platforms achieve their objective, which is to maximise their market value. Three cases are considered, and we demonstrate that the price discrimination strategy cannot attract more agents and at the same time increase the profits; a lower price discrimination threshold cannot ensure larger markets shares; a higher discount rate is detrimental to the profit of a platform. However, this is good for its market shares. Moreover, discriminative pricing increases the competition.
Highlights
PC operation systems, payment cards, shopping malls, electric commerce platforms, video-games, newspapers, network televisions, real estate agents, dating services and nightclubs have attracted significant attention, especially after the publication of the following seminal papers by Armstrong (2006a), Caillaud and Jullien (2003), Rochet and Tirole (2003) and Schiff (2003)
Our analysis differs from previous work in two additional ways: first, different goals can be achieved when platforms use the price discrimination strategy, either maximising profits or maximising market shares; second, we focus on how platforms can successfully implement price discrimination in a competitive environment
We show that (1) a two-sided platform that uses a price discrimination strategy cannot result in both attracting more agents and increasing profits; (2) larger discount rates are bad for a platform’s profit, but are good for its market shares; (3) The best response strategy for a platform aiming at maximising its profit is to retain the strategy when its opponent chooses a price discrimination strategy, otherwise this results in a smaller profit, despite the discount rates; (4) the equilibrium profits are smaller in comparison with the profits when a no-price discrimination strategy has been used
Summary
PC operation systems, payment cards, shopping malls, electric commerce platforms, video-games, newspapers, network televisions, real estate agents, dating services and nightclubs have attracted significant attention, especially after the publication of the following seminal papers by Armstrong (2006a), Caillaud and Jullien (2003), Rochet and Tirole (2003) and Schiff (2003). Because research into two-sided markets is still in its infancy, many unresolved issues remain: (1) whether the beneficial claim to all the agents of the price discrimination strategy in sales promotion hold true; (2) whether an increase in discount rates attracts more agents and increases profits; (3) whether the price discrimination strategy is always better than the no-price discrimination strategy; (4) how platforms correctly choose the price discrimination in order to accomplish different goals. Addressing each of these issues is the main goal of this paper.
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