Technology options and optimal pricing of a two-sided mobile payment platform

This study investigates the pricing strategies of a mobile payment platform connecting merchants and customers who may bypass the platform and trade in cash. Our analytical model incorporates cross-side network externalities at both sides of the platform. We find that the optimal pricing strategy involves cross-subsidization, including subsidizing customers to register for the service while charging the merchants per transaction. Moreover, the technology option adopted by the platform influences this optimal pricing format. In particular, the platform should subsidize customers more if the payment technology imposes larger transaction costs on customers and charge merchants more if banks demand a higher payment processing fee. Our major findings remain qualitatively valid when per-transaction subsidy is available and the marginal benefit of cross-side network externalities diminishes. Finally, the presence of a platform improves social welfare if the per-transaction subsidy sufficiently stimulates consumption on the platform.