The Impact of Price-sensitivity on Platform’s Service Effort Strategy in a Two-sided Market

Abstract

In a two-sided market, the two-sided platform may choose to invest in service effort to attract buyers and sellers, meanwhile buyers and sellers are price-sensitive. This paper investigates how the two-sided platform sets her pricing and service effort strategies when the buyers and sellers are price-sensitive. The equilibrium strategies are derived when the platform does not offer service effort and when the platform offers service effort. The results indicate that, the cross-network externality does not impact on the price when the platform does not offer service effort, but it impacts on the price positively when the platform offers service effort. Meanwhile, the price-sensitivity impacts on the platform’s profit and optimal scales of buyers and sellers negatively. Then, the results show that the optimal strategy for the platform is offering service effort, but it may hurt the buyers and sellers’ surplus and social welfare in certain scenario.