Upgrade strategies in the two-sided market: Updated strategy vs. derived strategy

Abstract

Product innovation and service upgrades are effective measures for firms to improve their competitiveness. Considering the upgrading of the installed customers (IU), the upgrade strategy of a platform firm usually follows two principles, namely, the derived principle (i.e., the basic product still operates when the new derived product is released) or updated principle (i.e., the basic product stops operating when the new product is released). This study investigates whether an upgraded strategy considering IU is beneficial to the platform and which upgrade principle is preferred by platforms in a two-sided market. To explore the optimal upgrade strategy of a platform, we set up a monopoly model and propose three upgraded strategies: the traditional strategy (which does not consider IU), the updated strategy and the derived strategy. The updated strategy can be seen as a discrimination price between the installed and potential buyers. However, the derived strategy helps the platform to classify the buyers into low- and high-end ones. Compared to the traditional strategy, the platform will get higher commission profit and lower membership profit by using the strategies considering IU.

Keywords:

• Two-sided market
• upgrade strategy
• product innovation
• installed customer

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work is partially supported by the Key Program of the National Natural Science Foundation of China [grant 71731010] and the National Natural Science Foundation of China [grant 71571174].