Optimal Dynamic Pricing Of Online Platforms With Network Externalities

Platform economics has developed rapidly with the innovations in information technology of Web 2.0.As online platform has been widely applied in many industries,a reasonable pricing strategy holds a crucial status to the development of enterprises.Direct network externalities exist in single-sided platform,while two-sided platform exhibits both direct and indirect network externalities,which increase the pricing difficulty.In order to maximize profits,platform provider should give consideration to both price and network scale.Most online platform providers have capability to adjust price in real time,which adds advantage to dynamic pricing strategy.Therefore,it has a theoretical and practical significance to apply dynamic pricing method to online platforms.Taking the consumer preference into consideration,this paper develops a dynamic pricing model of online platforms with network externalities during a finite horizon,in order to maximize the profit of a platform provider.Firstly,this paper solves the model by applying the maximum principle and obtained the optimal policies;Then it investigates the impacts of cost coefficient,network externality,product quality,trial rate and discount rate on optimal price,number of subscribers and total revenue according to both analytical and numerical solutions.The results show that it is advisable for platform provider to charge higher price in case of lower cost and higher quality,while lower initial price and smaller reduction in case of stronger network externalities.The disparity of indirect network externalities results in the asymmetry of the two-sided platform and divides it into a subsidy side and a money side.Moreover,stronger network externalities,lower cost coefficient and higher product quality bring the platform provider more profits.