Dynamic Platform Design

32 Pages Posted: 9 Oct 2014 Last revised: 18 Nov 2014

Date Written: October 1, 2014

Abstract

I model dynamic product design along price and non-price dimensions by a firm in a market with positive network externalities between consumers. In the case of a usage fee, I provide conditions under which the steady state (SS) is unique and show that the introductory price is negative and therefore below the positive SS price. Moreover, SS price increases with the size of demand frictions and is therefore higher than in a static model. A welfare maximizer's SS price is lower than a profit-maximizer's, and it is negative if demand frictions are low enough. If a platform chooses product scope (in the sense of Johnson and Myatt [2006]), it is optimal to begin as a niche platform and to broaden scope as market share increases. When the platform can target different groups of consumers with different prices, it caters to those consumers whose price-elasticity of demand is large relative to their valuation for network externalities. Finally, we show how the model can be extended to the case where consumers have multidimensional types and make heterogeneous contributions to the network’s value.

Keywords: Production, Pricing, and Market Structure, Networks, Network Formation and Analysis, Existence and Stability Conditions of Equilibrium, Dynamic Analysis, Firm Behavior, Theory, Monopoly

JEL Classification: L11, L14, D85, C62, C61, D21, D42

Suggested Citation

Veiga, Andre, Dynamic Platform Design (October 1, 2014). NET Institute Working Paper No. 14-15, Available at SSRN: https://ssrn.com/abstract=2506461 or http://dx.doi.org/10.2139/ssrn.2506461

Andre Veiga (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

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