Pricing on Two-Sided Markets

Question 1

Two-Sided Markets

Answer 1

1. Two-Sided market: Platform sells to two groups of customers whose demand is interrelated
2. Cross-group externalities = indirect network effects
3. Example: Trade show organizer (With Exhibitor market: Booth space and Visitor market: Tickets)

Question 2

Two-Sided Markets - Types

Answer 2

a. Exchanges
b. Advertising-supported media
c. Transaction systems
d. Software platforms

Question 3

Pricing Principles

Answer 3

1. Cross-group externalities require simultaneous pricing decisions for both sides of the market
2. Simple rules for single-sided markets do not apply
3. Optimal price may be below marginal cost

Question 4

Drivers of optimal prices

Answer 4

a. Price elasticities
b. Cross-group externalities
c. Costs
d. Competition

Question 5

Conclusions

Answer 5

1. Decision support system:
   a. Good model fit for willingness-to-pay functions
   b. Optimization yields plausible results
2. Large increases in profit contribution possible
   a. Linear tariffs: 5 %
   b. Two-part tariffs: 49 %,
   c. Two-part tariffs with max. number of participants: 24%
3. Revenues generated mostly in the exhibitor market

Question 6

Interdependencies between Products

Answer 6

1. Complements
2. Substitutes
   a. Horizontal differentiation:
   i. Differences in product attribute where consumers have different preferences (no obvious differences in terms of quality)
   ii. Examples: ice cream flavors, colors of the iPhone
   b. Vertical differentiation:
   i. Differences in product attribute where customers have the same preference ranking
   ii. Examples: power of a car’s engine, capacity of the iPhone

Question 7

Pricing for Products with Interdependent Demand

Answer 7

2. Complements: Cross-price elasticities are negative
   - -> optimal price lower than for single product
3. Substitutes: Cross-price elasticities are positive
   - -> optimal price higher than for single product

Question 8

Correction term is higher …

Answer 8

a. The more products in the product line,
b. The larger the absolute cross-price elasticities,
c. The closer the absolute value of the direct price elasticitiy is to 1,
d. The larger the profit contribution per unit of the other products,
e. The larger the ratio of sales of products i and j.

Question 9

Pricing for Horizontally Differentiated Substitutes

Answer 9

1. Demand elasticities and costs can differ (e.g., due to different prices for strawberries and cherries for the ice cream)
2. Nevertheless: usually uniform pricing for all variants
3. Explanations:
   a. High menu-costs, but small gains from price discrimination
   b. Consumers may feel that unequal prices are unfair

Question 10

Study: Pricing Digital Content Product Lines - Implementation & Impact

Answer 10

a. Policy implementation:
i. Keep prices for printed titles as before
ii. Pdf price = 75 % of print price
iii. Bundle price = 120 % of print price
b. Revenue 1 year after implementation:
i. Online channel + 14.4 %
ii. Overall + 5 %

Question 11

Decoy Effects

Answer 11

1. Context effects: Choice between two products depends on what other products are available
   a. Range effect: value of a product depends on its position between the extremes of an attribute
   b. Frequency effect: value of a product depends on how many alternatives are worse on an attribute
2. Some firms introduce decoys to make a target product more attractive