Pricing strategy for own shipping service of E-commerce platform using Two-sided market theory

Abstract

• Examining how the cross-network effect influences the price decision and profit of a two-sided market platform. • Developing a two-sided market pricing model to consider the ancillary services such as shipping service as well as intermediation services. • Suggesting how to allocate the e-commerce platform’s shipping fees and usage fees for maximizing profits based on the two-sided market theory. • Building up two-stage price allocation model considering cross-group externality to explain the activities of e-commerce platform operator, buyer and seller. • Providing implications for pricing strategies for the platform to apply, according to the degree of buyers’ sensitivity on the shipping fees and usage fees. • Providing influence of pricing strategies on the individual usage fees paid by sellers and buyers. Recently, many e-commerce platforms are trying to provide their own shipping services. In this context, this study suggests how to allocate the platform’s usage fees and shipping fees for maximizing profits based on the two-sided market theory. Our research assumes a monopolistic e-commerce market and presents sellers' and buyers’ demand of the platform as reduced-form equations considering cross-group externalities. Then, we divide a price allocation model into two stages using these demand functions. First, we determine the usage fees of each group that maximize the platform profits when total usage fees and shipping fees are constant. Second, we decide how to allocate total usage fees and shipping fees when the total price level (total usage fees + shipping fees) is constant. As a result, this study proposes that the platform can apply two different pricing strategies according to the degree to which buyers are sensitive to usage fees and shipping fees and also shows how these pricing strategies influence the individual usage fees paid by each group.