Publication Type
Journal Article
Version
acceptedVersion
Publication Date
5-2020
Abstract
Two-sided platforms are often coupled with exclusive hardware products that connect two sides of users, the consumers of the hardware product (i.e., buyers) and the application developers (i.e., sellers). The hardware product in the platform business model introduces three important issues that are not yet well understood in the literature of platform pricing: potentially downward-trending production cost, product quality improvements, and consumers' strategic behaviors. Using analytical modeling, our study explicitly factors in these issues in analyzing a monopoly platform owner's two-sided pricing problem. The platform sequentially introduces and prices quality-improving hardware products, for which the costliness of quality may decrease. Strategic buyers make purchasing and upgrading decisions, which dynamically determines the buyer-side network size. Meanwhile, the seller-side network size is determined endogenously. We find that, an increase in the likelihood or magnitude of future costliness reduction raises the initial buyer-side price of the low-quality product and lowers the seller-side fee. This strategy, in turn, creates an indirect intertemporal effect that allows the platform to also raise the buyer-side price(s) of the product(s) sold later. These findings contrast with conventional wisdom and provide an economic explanation for premium introductory pricing of many platform products. Moreover, we find that strengthening the network effect can result in more pronounced increases in the buyer-side prices.
Keywords
Dynamic pricing, two-sided platforms, sequential innovation, network effects, strategic consumers
Discipline
Databases and Information Systems | Technology and Innovation
Research Areas
Information Systems and Management
Publication
Production and Operations Management
Volume
29
Issue
5
First Page
1122
Last Page
1144
ISSN
1059-1478
Identifier
10.1111/poms.13157
Publisher
Wiley: 24 months
Citation
LIN, Mei; PAN, Xiajun Amy; and ZHENG, Quan.
Platform pricing with strategic buyers: The impact of future production cost. (2020). Production and Operations Management. 29, (5), 1122-1144.
Available at: https://ink.library.smu.edu.sg/sis_research/4851
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1111/poms.13157