Many two-sided platforms offer innovative hardware products that improve in quality and enter the market sequentially. This paper studies the impact of the decrease in the production cost on a monopoly platform owner's dynamic two-sided pricing problem, in which buyers are strategic and network effects are present. Our findings show that the decreasing cost raises the optimal price of the low-quality product (introduced first) and allocates more buyer-side demand to the future market. Moreover, a decrease in cost leads to a higher optimal price even for the higher-quality product (introduced later), given a sufficiently significant quality improvement. This suggests that the decreasing cost may enable the platform to position its product line to the high-end market. Compared to the base case absent the seller side and network effects, the two-sided case shows that the network effect intensifies the impact of the cost decrease on the price of the low-quality product and makes the forward buyer-side demand shift to the future market more pronounced. Furthermore, the network effect propagates intertemporally, which may reverse the impact of the cost decrease on the optimal price of the high-quality product in the base case, when the quality improvement is less significant. Our work provides a dynamic perspective to the two-sided pricing problem by considering key factors such as network effects, buyers' strategic behavior, production cost, and quality improvements.
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