Competing Platforms In Two-Sided Market With Switching Cost And Linear Demands

Two-sided market is a new issue rising in the theory of Industrial Organization. Unlike the multiproduct oligopoly or monopoly in traditional microeconomics, the interactions between the two sides of two-sided market give rise to strong complementarities, but the corresponding externalities are not internalized by end users. Many if not most markets with network externalities are two-sided. The platform firms in two-sided market must choose not only a price level but also a befitting price structure considering interests of both sides. Most of the existing literatures about two-sided market are made in static game framework and ignore switching cost which is a very important factor in end users' decision. In fact, the existence of switching cost enhances the network externalities in the market. This paper examines a two-period two-sided market with linear demands in which end users are partially "locked in" by switching costs that they face in the second period. It unveils the determinants of price strategies and which side of the market is subsided in order to attract the other side. We show that first-period market share can bring platform firms profit. And with switching cost, the optimal pricing strategies don't completely accord with rules in two-sided market without switching costs (Rochet, J.-C, and J. Tirole (2001)) because platform firms are apt to charge buyer side a lower price for market share in the first period. But the appearance of switching cost can not make the platform firms better or worse exactly, the market structure and switching cost effect the firms' price strategies and total discounted profits together. The processes of buyer side prices in the model are similar to that in a market without network externalities. But final conclusions are different because of the distinct market structure.