The side with larger network externality should be targeted aggressively? Monopoly pricing, reference price and two-sided markets

Abstract

Abstract This study highlights the pricing strategy in two-sided markets under a monopoly structure considering the reference price effect. Based on economic and psychological criteria, we model the research question using game theory and the equilibrium results are obtained through optimizing the profit function. Some interesting results are obtained. First, the reference price effect on one side influences the pricing strategy of the other side due to the existence of the cross-group network externality. Additionally, the group with a larger network externality may not be targeted aggressively as described by the conventional conclusion when considering the reference price effect. Furthermore, whether to charge or subsidize either side depends on the intensity of the cross-group network externality and reference price effect. This study explains the observed phenomenon that the platform always provides a lower preferential price and a higher original price, and studies the optimal pricing strategy in two-sided markets in this case.