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Platform Pricing and Investment to Drive Third-Party Value Creation in Two-Sided Networks

Author

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  • Burcu Tan

    (Anderson School of Management, The University of New Mexico, Albuquerque, New Mexico 87106;)

  • Edward G. Anderson, Jr.

    (McCombs School of Business, University of Texas, Austin, Texas 78705;)

  • Geoffrey G. Parker

    (Thayer School of Engineering, Dartmouth College, Hanover, New Hampshire 03755)

Abstract

Many two-sided platforms (for example, eBay, Google, iOS, Android, Twitter, and Amazon) provide integration tools, such as modular interfaces, interactive development environments, application programming interfaces, and help desks, to reduce the costs and improve the functionality of third-party content developed for the platform. The need for such investment is increasing with the rise of major new markets as the result of technologies, such as the “Internet of Things.” Although crucial to platform success, platform integration tools are costly to create. We develop an analytic model to explore the key tradeoffs behind investment in integration tools and how that investment interacts with pricing decisions in a two-sided market. We model these decisions for hardware/software platforms as well as hybrid retail platforms and analyze them under various scenarios, including monopoly and competition. Our results suggest that considering integration investment can create market regimes in which the standard pricing results from the extant platform literature no longer hold. For example, the tendency to reduce prices to one side of a market in response to increasing the benefit of the network to the other side may be suboptimal in the presence of integration investment. Therefore, integration investments must be well coordinated with pricing decisions made for both sides of the market. In general, higher levels of investment by hardware/software platforms into integration become desirable when the platform (1) has access to a large pool of content providers and consumers, (2) is able to develop integration tools that are highly effective in reducing third-party development costs, and (3) operates in a market in which content providers earn a high-enough profit margin creating content that is highly valued by the consumer market. Hybrid retail platforms often show similar behavior. However, there are some nuances. For example, business to business platforms can make investments in integration to facilitate participation by both sides of the market. We find that these investments are complements, not—as one might expect—substitutes. We conclude by discussing this work’s implications for theory and practice.

Suggested Citation

  • Burcu Tan & Edward G. Anderson, Jr. & Geoffrey G. Parker, 2020. "Platform Pricing and Investment to Drive Third-Party Value Creation in Two-Sided Networks," Information Systems Research, INFORMS, vol. 31(1), pages 217-239, March.
    • Handle: RePEc:inm:orisre:v:31:y:2020:i:1:p:217-239
    DOI: 10.1287/isre.2019.0882
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