Dynamic Innovation in a Two-Sided Platform

Publication Type

Conference Paper

Publication Date

1-2011

Abstract

We are interested in a two-sided platform, in which dynamic innovation plays a role in stimulating consumer demand that also drives firms' incentive to innovate. By explicitly modeling the price competition within the two-sided market, we study ways consumers' platform fee interacts with firms' pricing strategies on the platform. Our framework also characterizes a dynamic R&D race and solves the stationary Markov equilibrium using computation methods. We find that by charging consumers a fee, the platform is not necessarily better off, because firms may subsidize this cost by lowering their prices in the market, which leads to lower transaction revenues and innovation rate. Platform's revenues may also suffer if it shares firms' transaction revenues. Surprisingly, despite the platform fee, consumer welfare improves as a result of lower prices. However, these effects are not monotonic, and shifts in the opposite direction occur when firms switch to different pricing strategies, because consumers' platform fee also mitigates price competition between low- and high-quality firms.

Keywords

Markov equilibrium, consumer welfare, dynamic innovation, firm pricing strategy, incentive modeling, platform fee, price competition, two-sided market

Discipline

Computer Sciences | E-Commerce

Research Areas

Information Systems and Management

Publication

Hawaii International Conference on System Sciences, 47th

First Page

1

Last Page

9

ISBN

9780769542829

Identifier

10.1109/HICSS.2011.173

Publisher

IEEE (HICSS-44)

City or Country

Kauai, Hawaii

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