Dynamic Platform Design

Andre Veiga ()
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Andre Veiga: Nuffield College, Oxford University, 1 New Road, Oxford OX1 1NF, United Kingdom

No 14-15, Working Papers from NET Institute

Abstract: Abstract I model dynamic product design along price and non-price dimensions by a firm in a market with positive network externalities between consumers. In the case of a usage fee, I provide conditions under which the steady state (SS) is unique and show that the introductory price is negative and therefore below the positive SS price. Moreover, SS price increases with the size of demand frictions and is therefore higher than in a static model. A welfare maximizer's SS price is lower than a profit-maximizer's, and it is negative if demand frictions are low enough. If a platform chooses product scope (in the sense of Johnson and Myatt (2006)), it is optimal to begin as a niche platform and to broaden scope as market share increases. When the platform can target different groups of consumers with different prices, it caters to those consumers whose price-elasticity of demand is large relative to their valuation for network externalities. Finally, we show how the model can be extended to the case where consumers have multidimensional types and make heterogeneous contributions to the network's value.

Keywords: Production, Pricing, and Market Structure; Networks; Network Formation and Analysis; Existence and Stability Conditions of Equilibrium; Dynamic Analysis; Firm Behavior: Theory; Monopoly (search for similar items in EconPapers)
JEL-codes: C61 C62 D21 D42 D85 L11 L14 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2014
New Economics Papers: this item is included in nep-com, nep-mic and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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