Applied pricing on platform markets

1. Applied pricing
on platform markets
Dr. Paul Marx
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This presentation is based on the course „Platform strategy“ by Prof. Ling-Chieh Kung of National Taiwan University

2. What are Platforms?
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A platform connects multiple entities for them
to communicate and trade with each other.
It does not generates products or services by itself.
On a single-sided platform, entities are at the same side.
- Their objectives are the same
- E.g., social networking
On a multi-sided platform (MSP), entities are at different sides.
- Their objectives are different
- E.g., C2C marketplaces
As opposed to a merchant who sells products or services,
an MSP sells connections and/or information.
Consumers
Platform
Suppliers

3. Why Platforms?
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• Low initial investment (or is it high?) )
• No need to worry about warehouse, logistics, customer service, etc.
• Affordable and reliable cloud services
• Extendibility and high potential of growth
• Existing users bring in new users (customers)
• The costs of serving consumers are paid by supplier
• Data collection an digital business
• All transactional and behavioral data can be collected
• The (digital) platform itself is a competitive advantage

4. Network Growth, Critical Mass, and
the Chicken-and-Egg Problem
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Value
of
the
Network
Number of the users
Costs of participation
• The chicken-and-egg problem:
• If there are a lot of users on the platform,
there will be more and more
• If there’s no users on the platform,
no one wants to join
• The number of users distinguishing this two situations
is called “critical mass”.
• How to reach critical mass?
• High stand-alone-benefit
• Subsidization
• Focusing
Condition for joining a platform:
SAB + NB – P >= 0

5. Platform Pricing
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• The core of platform pricing: cross subsidization
• Reduce the price (to lower than the marginal costs,
• zero, or even negative) for one side.
• So that we may charge the other side more!
• Examples:
• C2C marketplaces: Sellers subsidize the buyers
• Job searching websites: Companies subsidize the applicants
• Why cross subsidization? Why charging nothing?
• Cross-side network effects!
Consumers
Platform
Suppliers
$↓
$↑

6. Cross Subsidization
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• The key question:
• Which side should be a subsidizer
(that contributes more revenue)?
• Which side should be a subsidized
(that enjoys discounts)?
• What is not cross subsidization?
• When platform pays to attract
new customers, it is subsidization,
not cross subsidization
• Price discrimination is not
cross subsidization, it’s purpose is
completely different (e.g., music streaming: ad-supported, ad-free accounts, family plans)
• Cross-subsidization is a revenue strategy

7. Whom to charge?
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Subsidizer Sibsidizee
Price elasticity low high
Marginal cost of growing
Same-side network externality
Multi-homing and switching costs
Easiness of collecting fees
Decision „rules“
• Price elasticity/sensitivity
• Charge more from the side with lower
price elasticity
• -”if they care less about money, charge
them more”
• Examples:
• C2C marketplaces:
Sellers subsidize buyers
• Job searching websites:
Companies subsidize applicants
• Search engines?

8. Whom to charge?
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Subsidizer Sibsidizee
Price elasticity low high
Marginal cost of growing high low
Same-side network externality
Multi-homing and switching costs
Easiness of collecting fees
Decision „rules“
• The marginal cost of growing of a side is the
additional operating cost needed to serve one
more user at that side.
• E.g., in C2C marketplaces
• Adding a buyer -> Marginal cost of
growing is almost 0
• Adding a seller -> What are the marginal
cost of growing?
• A platform should charge more from the side
with a higher marginal cost of growing
On social networking sites users are typically
subsidized to join for free. Who subsidizes them?

9. Whom to charge?
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Subsidizer Sibsidizee
Price elasticity low high
Marginal cost of growing high low
Same-side network externality negative or weak strong
Multi-homing and switching costs
Easiness of collecting fees
Decision „rules“
• When one side exhibits positive same-side
network externality, existing users bring in
new users.
• E.g., instant messengers
• A platform should charge less from the side
with a strong positive same-side network
externality
Who subsidizes users to feely use instant
messengers?

10. Whom to charge?
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Subsidizer Sibsidizee
Price elasticity low high
Marginal cost of growing high low
Same-side network externality negative or weak strong
Multi-homing and switching costs high low
Easiness of collecting fees
Decision „rules“
• When a user has multiple platforms to join:
• The multi-homing cost is paid to use
multiple platforms simultaneously
• The switching cost is paid to leave one
platform and switch to another one.
• A platform should charge more from the side
with higher multi-homing and switching
costs.
• Otherwise the users will go away
• E.g. eBay charges more from sellers to
subsidize buyers.
Why sellers on eBay have relatively high multi-
homing and switching costs?

11. Whom to charge?
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Subsidizer Sibsidizee
Price elasticity low high
Marginal cost of growing high low
Same-side network externality negative or weak strong
Multi-homing and switching costs high low
Easiness of collecting fees high low
Decision „rules“
• Sometimes thigs are simple:
it may be too costly to charge a side.
• C2C marketplaces:
It is easier to collect fees from sellers or
buyers?
• Search engines: Is it easier to collect fees
from advertisers or searchers?
• A platform should charge more from the side
that is easier to collect fees from.

12. Whom to charge?
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Subsidizer Sibsidizee
Price elasticity low high
Marginal cost of growing high low
Same-side network externality negative or weak strong
Multi-homing and switching costs high low
Easiness of collecting fees high low
Decision „rules“

13. Case 1: Online Reading Platforms
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• Online reading revolutionized the publishing
industry
• Two sides: Authors and readers
• Publishers?
• Here are some cash flows:
Readers
Novel Platform
Authors
Buy novels Free registration
Revenue
sharing
Listing fee?

14. Case 1: Online Reading Platforms
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• Who should be subsidizer? Who should be subsidized? Why?
• Should the platform charge listing fee from the authors? Why?
• Are there any other possible revenue sources (besides advertisement)?

15. Case 2: Video Game Consoles
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• Video game console manufacturers are all
platforms.
• Two sides: game developers and players
• Retailers?
• Here are some cash flows:
Players
Game Platform
Game developers
Buy games Buy consoles
Revenue
sharing
Pay
SDK Fee

16. Case 2: Video Game Consoles
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• Who should be subsidizer? Who should be subsidized? Why?
• Do players have positive same-side network externality? Is it strong?
• Developers pay a lot to get the right to create games. Why not the opposite?

17. Case 3: Airbnb
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• Airbnb is a two-sided platform
• Two sides: travelers and house owners
• Here are some cash flows:
• When the room price is $100, typically
• The traveler pays $106
• The house owner gets $97
Travelers
Airbnb
House owners
Book
rooms
Pay service fees
Revenue
sharing
Free
registration

18. Case 3: Airbnb
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• Which side should be subsidized? Why?
• Why both sides are paying?

19. Dr. Paul Marx | How Advancements in Technlogy Influence Markeitng: NLP
RF CPFATJVF
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20. Dr. Paul Marx | How Advancements in Technlogy Influence Markeitng: NLP
RF CPFATJVF
20
This presentation is based on the course „Platform strategy“ by Prof. Ling-Chieh Kung of National Taiwan University