Value-added service investing and pricing strategies for a two-sided platform under investing resource constraint

Abstract

Investing on value-added service (VAS) amplifies users’ participation and platform profit. However, the investing resource is usually limited in practice. This paper investigates VAS investing and pricing strategies for a two-sided platform under investing resource constraint. We reveal that with VAS investment, Subsidizing can still be done to enlarge users’ demand, even when the investing cost becomes higher. For optimal pricing strategies, the network effect will be the dominating determinant if the gap between two marginal cross-side benefits (i.e. the benefit that users obtain when each new user join the other side of the platform) is large. Interestingly, we show that with the increase of the marginal investing cost, users might either be priced higher or lower. If the marginal investing cost increases to a high level, and the gap between the two marginal cross-side benefits is large, lowering the access fee for users possessing the higher cross-side network effect does not necessarily compensate more profit loss caused by higher cost. Moreover, after VAS is developed, raising the access fee for those whose marginal investing benefit is large does not necessarily generate more profit as well. The opposite strategy further enlarges users’ utility, and promotes the investment to benefit more users.

Keywords

Network effect / optimization / two-sided market / value-added service investment / investing resource constraint

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