A Research On Pricing Strategy And Regulation Of The Third Party Payment Platform Based On Two---sided Market Theory

The development of Internet technology and E-Commerce in China leads to the steady increase in online transaction volume of China. Accordingly, the industry of third party payment service is experiencing a profound progress.After a one-decade development, the third payment service industry of China is made up of several mature sectors. The sector of processing credit or debit card payments and that of processing online transaction payment are the most important sectors in the third payment service industry. The government of China started to issue licenses to the businesses in the industry, which in turn increase the barrier for businesses to enter the industry. However, the competition in the third party payment service industry is increasingly fierce. As China Union-Pay, who is playing in the monopoly position, is imposing barriers for competitors who are conducting business online to expand their market to offline areas, the businesses in the industry such as Alipay has to give up their plan to expand their business into offline section in the industry. At the same time, the acquiring banks from other countries are working for the industry license issued by Chinese government to enter Chinese market.The third party payment service industry has made progress in traditional businesses and innovative businesses along with fierce competition in the industry. The online transaction volume and dollar amount conducted through third party payment service are higher and higher. Meanwhile, the fast advance in the industry is companied by potential risks. The risk involved in the industry calls for opportune regulations by authorities. Since the beginning of the industry, there has been a time leg between the development of the industry and the regulation in the industry. In recent years, The People’s Bank of China and the authorities have pay attention to developing regulations in the industry by properly improving regulation system and strictly enforcing current regulations. In this way, the third party payment service industry is expected to advance under a proper regulation system.In the beginning of the paper, the author talks about last two aspects of the third party payment service industry of China. Then, the paper is divided into four sections. In the first section, the author illustrates two-sided market theory. Then, the author will evaluate third-party payment service industry according to the three features of two-sided market:the relationships of players in the industry, the complex externality of network, and the best solution of externality, two-sided platform. The evaluation leads to the conclusion whether the third party payment service industry is a two-sided market. The second section is the history of third party payment service industry. In this section, the author summarizes the key characteristics of the industry. In turn, it concludes that the industry is a representative market of two-sided market. In the third section of the paper is a throughout analysis of third-party payment service industry. The author utilizes the two-sided market theory in the analysis. The analysis is based on a two-sided market model. With the model, the author illustrates the price setting mechanisms and choice making behavior under regulations. In the process analyzing the price setting mechanism, Alipay is utilized as an example to verify the assumptions and conclusion of two-sided market theory. In the forth section of the paper, the author analyzes the effectiveness and feasibility of regulations imposed by The People’s Bank of China. In the end, the author offers some suggestions for the future regulations.The innovation of this paper is the application of two-sided market theory in analyzing third party payment service industry from both the aspect of price setting and the aspect of regulations. In the term of price setting mechanisms, the paper demonstrates third party payment service industry as a two-sided market, takes the current situation of the industry into consideration, and builds up a pricing model for Chinese third party payment platforms. During the process of modeling, the paper takes the complex externality of networks in the industry into consideration and applies the modern industrial organization theory, which in turn demonstrates the pricing mechanism and operating mechanism of the industry. It is expected that the conclusion will afford valuable recommendations for small-sized and middle-sized platforms. The feature of two-sided market suggests a direction for authorities to set regulations in this industry. The analysis in this paper will provide some theoretical basis for regulation issuance.