Two-sided dynamic pricing and value-added service investment strategies of competitive platforms considering indirect network effects

Abstract

In recent years, many platforms have realized that relying on subsidies and low-price strategies may result in limited access to users. To expand the market scale and realize the second growth in user scale, some platforms have started adding value-added service (VAS) investment. In this study, we focus on two competing platforms whose bilateral users can be multi-homed. Considering that the users' scale and indirect network effects (INEs) at the initial stage affect their willingness to access and the platforms’ VAS investment in the next stage, we build a two-stage game model to study the two-sided dynamic pricing decisions of competitive platforms when VAS is offered. The results indicate that the platforms should formulate different pricing strategies at two stages. In the first stage, the platforms can adopt a strategy of subsidizing or charging. Particularly, under certain conditions, it will be more beneficial for the platforms to subsidize the side users with the weaker strength of INE. Differently, in the second stage, the platforms should always charge bilateral users. Moreover, at this stage, the platforms will implement differentiated VAS and pricing combination strategies for both sides; they can offer a lower VAS level to one side of users but charge them a higher access fee, while offering a higher VAS level to the other side of users but charge them a lower access fee.