Abstract
This study investigates the pricing strategies of a mobile payment platform connecting merchants and customers who may bypass the platform and trade in cash. Our analytical model incorporates cross-side network externalities at both sides of the platform. We find that the optimal pricing strategy involves cross-subsidization, including subsidizing customers to register for the service while charging the merchants per transaction. Moreover, the technology option adopted by the platform influences this optimal pricing format. In particular, the platform should subsidize customers more if the payment technology imposes larger transaction costs on customers and charge merchants more if banks demand a higher payment processing fee. Our major findings remain qualitatively valid when per-transaction subsidy is available and the marginal benefit of cross-side network externalities diminishes. Finally, the presence of a platform improves social welfare if the per-transaction subsidy sufficiently stimulates consumption on the platform.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 Mobile payments—also known as mobile money transfers—can be initiated and confirmed “on the move” (remote payments) or at a Point of Sale (POS) (proximity payments) through credit cards or prepaid wallets connected to a mobile application (Pandy, Citation2014). In this study, we focus on proximity payments.
2 In this study, we follow the literature of multi-sided platforms by unifying the words in the exposition that the term “subsidy” denotes the benefits/discounts provided by the platform to a side to attract participation.
3 Contactless payments may also be supported by non-NFC technology, such as MST (magnetic secure transmission). As NFC is currently the dominant contactless technology, the terms “contactless” and “NFC” are used interchangeably in this paper.
4 We may still include p in expressions when it makes the exposition and discussion clearer.
5 One may find that the two Chinese mobile payment giants Ali Pay and WeChat Wallet both adopt the QR-code technology. While we agree with this observation, we would also like to point out the specialty of China’s environment. Our findings for the general case may not apply to this special case.
6 We thank an anonymous referee for this note.
7 It can be verified that within the parameter region, the perceived quality function satisfies both conditions outlined in Proposition 3.