One-side value-added service investment and pricing strategies for a two-sided platform

Abstract

To widen user participation and increase profit, two-sided platforms may invest on value-added services (VASs) for users. Due to the cross-market network externality, the investment for one side would affect the utility of users on two sides, thus affect the demand and profit of the platform. In this paper, we investigate one-side VAS investment and pricing strategies for a two-sided platform. It is revealed that it is optimal to invest at the maximum level for any marginal investing cost below a certain threshold, and to decrease the investment when the marginal investing cost increases above the threshold. We find that compared with the case of no investment, the invested user side will always be priced higher, while the uninvested user side may either be priced higher or lower, depending on the relative magnitude of mutual cross-market network externalities. If both sides are priced higher after the investment, the price increment for uninvested user side could be larger than that for invested user side.