Pricing strategies in two-sided platforms: The role of sellers’ competition
This paper offers a model of a two-sided platform to inspect how competition and prices in the seller side affect the platform’s behavior, incentives and profits. When setting prices, sellers may be constrained by one of two margins: the demand margin and the competition margin. According to the competition margin a seller sets its price equal to the marginal contribution to the users utility. However, a seller may set a lower price because it also has to take into account the demand margin: a higher price reduces the overall demand for the platform and the sellers. This central result is used to compare the efficiency of vertical integration and the private incentives to partially integrate. Several interesting insights are obtained; in particular, the model can explain the tendency of firms which operate software platforms to integrate with so-called killer applications. The paper also shows that the platform has an instrument to profitable affect sellers’ prices and to induce the margin that will bind. It is proved that the degree of competition among sellers is a crucial factor determining profitability of the platform.
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