Endogenous network e ffects, platform pricing and market liquidity
Mei Lin, Ruhai Wu and Wen Zhou
October 16, 2015
Abstract
This paper examines a monopoly platform's two-sided pricing strategies in a setting with seller competition, which gives rise to not only positive cross-side network e ects between buyers and sellers, but also a negative same-side network e ect among sellers. We show that platform pricing depends crucially on the characteristics associated with market liquidity, which contrasts with the previous studies that point to the two sides' relative demand elasticities and/or network e ects. A market is said to be more liquid when it has less friction, resulting in a larger total surplus for the platform economy and hence greater equilibrium entry on both sides. We find that in response to higher market liquidity, the platform raises the buyer entry fee and lowers the seller entry fee. The platform's subsidy strategy is consistent: market liquidity is conducive to seller subsidy but hinders buyer subsidy.
Keywords: Two-sided platforms, network e ects, market liquidity, subsidy, product di fferentiation
JEL codes: L1, L11, L22, L86
