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ABSTRACT
Multi-sided platforms must make decisions on both pricing and engineering investment and must continually adjust them as the platform scales over its lifecycle. Engineering investments can be allocated to features that improve a platform’s standalone value, social features to take advantage of same-side network effects, or integration tools and boundary resources to facilitate third-party content creation. Guidance in the academic or practitioner literature is not granular. Moreover, relevant normative economic models that consider externalities are rarely dynamic. Hence, there is a gap in knowledge about how to best balance tradeoffs between different strategic decisions throughout the entire platform lifecycle. To begin to address this gap, we explore normative strategies for coordinating pricing and engineering investment decisions on a continuous basis under different ecosystem conditions. We build a simulation model informed by economics and marketing theory and perform extensive sensitivity analyses on key parameters in different ecosystem scenarios over a multi-period lifecycle. We find that pricing and investment strategies must continuously change to perform optimally. In particular, strategies that are most effective at launch often differ from those that are most effective during scaling as well as those most effective at maturity. We also find that the optimal strategy depends strongly on the monetization model and market aversion to price changes. Lastly, we specifically examine four different industry segments: mobile platforms, social media, the sharing economy, and business-to-business. The results provide evidence that the trajectory of platform pricing and investment strategies should greatly differ depending on industrial context.
Disclosure statement
No potential conflict of interest was reported by the author(s).
SUPPLEMENTARY MATERIAL
Supplemental data for this article can be accessed online at https://doi.org/10.1080/07421222.2023.2229125
Notes
1 The term “platform” is ambiguous. In some industries, “platform” connotes a range of products that share an architecture and at least some components. In contrast, some academic literature uses the term to connote entities that create value through cross-side externalities in a multi-sided market. To avoid ambiguity, in this paper the term “platform” refers to a digital or digital-hybrid entity that delivers value in part via a same-side or cross-side externality.
2 Please see Esenduran et al. [Citation19] and Anderson et al. [Citation4] for further discussion on the methodological elements of system dynamics models that help overcome some limitations of traditional analytical modeling frameworks. Note that in system dynamics methodology, the analysis relies on examining the dynamic behavior of a complex system through a comprehensive set of simulation runs [Citation47]. The methodology does not involve mathematically proving theorems. See references in Sterman et al. [Citation49] and Anderson et al. [Citation4] for further examples in the literature.
3 In some two-sided platforms, the content provider side of the market is the advertisers (e.g., social media platforms). In that case, increased “content” availability reduces consumer utility, creating a balancing loop instead of a reinforcing one. We study an example in Illustrative Examples.
4 It is also possible for content providers to experience negative same-side network effects. This happens when content providers have to compete with one another to attract consumers such that an increase in content provider participation dampens the utility from joining the platform. We incorporate this negative feedback loop in an extension in the Online Supplemental Appendix 2.
5 Note that the logit choice model is similar to the Hotelling model, which is commonly used in the analytical literature on digital platforms (see examples provided in Tan et al. [Citation51]).
6 The inverse of βc is analogous to the transport cost in the Hotelling model.
7 Our results remain qualitatively the same if we assume diminishing returns to utility from consumers.
8 There are exceptions to this assumption of low value at platform launch. For example, a platform may start with an installed base of users if it is able to “piggyback” by connecting an existing user base from a different platform [Citation17, Citation41]. In this case, the platform benefits from network effects almost immediately. We analyze such scenario in Applications and Extensions. Moreover, in Limitations we further discuss when our results are most applicable.
9 Given the finite horizon nature of the model, there is an end-of-horizon effect whereby the platform engages in profit-taking behavior at the end with prices going up one last time. In the rest of the manuscript, we do not discuss the end-of-horizon effects since in practice platforms are generally ongoing firms, for whom the end-of-horizon is irrelevant.
Additional information
Notes on contributors
Edward G. Anderson
Edward G. AndersonJr. ([email protected]; corresponding author) is the Mr. and Mrs. William F. Wright, Jr. Centennial Professor for the Management of Innovative Technology at the University of Texas McCombs School of Business. He received his bachelor’s degree, with majors in electrical engineering and history, from Stanford University, and his Ph.D. in Management from the Massachusetts Institute of Technology. Dr. Anderson’s research focuses on supply chain innovation, the economics of platform system design, and distributed product development. His current projects include the structure of business-to-business platforms as well as government policy to promote supply chain resilience. He researches industries including smartphones, automotives, healthcare, construction, the Internet of Things, and Industry 4.0. Dr. Anderson frequently appears in the media, including Fox News, the Associated Press, Yahoo, and Fortune, and has testified as an expert witness on supply chain disruption before the Texas Senate. He has been elected a Fellow of the Production and Operations Management Society and is the recipient of the Jay W. Forrester Research Award. He has been an editor for supply chain management, information systems, and public policy areas at top academic journals. He holds six patents.
Geoffrey G. Parker
Geoffrey G. Parker ([email protected]) is the Charles E. Hutchinson ‘68A Professor of Engineering Innovation at Dartmouth College and serves as Executive Director of the Master of Engineering Management Program. He is also a research fellow at MIT’s Initiative for the Digital Economy where he leads platform industry research studies and co-chairs the annual MIT Platform Strategy Summit. He received a B.S.E. from Princeton and M.S. and Ph.D. from MIT. Dr. Parker has made significant contributions to the field of network economics and strategy as co-developer of the theory of “two-sided” markets. He is co-author of the book “Platform Revolution,” published in ten languages. He won the Thinkers50 Digital Thinking Award, along with Marshall Van Alstyne, for the concepts of the inverted firm, two-sided markets, and how firms can adapt and thrive in a platform economy. He has been elected as a Fellow of the Production and Operations Management Society and serves as a Fellow on the World Economic Forum’s Global Future Council on Advanced Manufacturing and Production. He also joined an expert panel of the European Commission to provide commentary and feedback on the EU Digital Markets Act. Dr. Parker is a frequent keynote speaker and advises senior leaders on their organizations’ platform strategies.
Burcu Tan
Burcu Tan ([email protected]) is an Associate Professor at Anderson School of Management, University of New Mexico. She holds a Ph.D. in Operations Management from the University of Texas at Austin and a BSc. and MSc. in Industrial Engineering from Bogazici University. Her research interests include digital platforms, product development, supply chain management, and system dynamics. Her work has been published in Information Systems and Operations Management journals such as Information Systems Research and Production and Operations Management. She is a Senior Editor of Production and Operations Management.