Unraveling the Mystery of the Hinterkaifeck Murders.pptx
Applied pricing on platform markets
1. Applied pricing
on platform markets
Dr. Paul Marx
1
This presentation is based on the course „Platform strategy“ by Prof. Ling-Chieh Kung of National Taiwan University
2. What are Platforms?
2
A platform connects multiple entities for them
to communicate and trade with each other.
It does not generates products or services by itself.
On a single-sided platform, entities are at the same side.
- Their objectives are the same
- E.g., social networking
On a multi-sided platform (MSP), entities are at different sides.
- Their objectives are different
- E.g., C2C marketplaces
As opposed to a merchant who sells products or services,
an MSP sells connections and/or information.
Consumers
Platform
Suppliers
3. Why Platforms?
3
• Low initial investment (or is it high?) )
• No need to worry about warehouse, logistics, customer service, etc.
• Affordable and reliable cloud services
• Extendibility and high potential of growth
• Existing users bring in new users (customers)
• The costs of serving consumers are paid by supplier
• Data collection an digital business
• All transactional and behavioral data can be collected
• The (digital) platform itself is a competitive advantage
4. Network Growth, Critical Mass, and
the Chicken-and-Egg Problem
4
Value
of
the
Network
Number of the users
Costs of participation
• The chicken-and-egg problem:
• If there are a lot of users on the platform,
there will be more and more
• If there’s no users on the platform,
no one wants to join
• The number of users distinguishing this two situations
is called “critical mass”.
• How to reach critical mass?
• High stand-alone-benefit
• Subsidization
• Focusing
Condition for joining a platform:
SAB + NB – P >= 0
5. Platform Pricing
5
• The core of platform pricing: cross subsidization
• Reduce the price (to lower than the marginal costs,
• zero, or even negative) for one side.
• So that we may charge the other side more!
• Examples:
• C2C marketplaces: Sellers subsidize the buyers
• Job searching websites: Companies subsidize the applicants
• Why cross subsidization? Why charging nothing?
• Cross-side network effects!
Consumers
Platform
Suppliers
$↓
$↑
6. Cross Subsidization
6
• The key question:
• Which side should be a subsidizer
(that contributes more revenue)?
• Which side should be a subsidized
(that enjoys discounts)?
• What is not cross subsidization?
• When platform pays to attract
new customers, it is subsidization,
not cross subsidization
• Price discrimination is not
cross subsidization, it’s purpose is
completely different (e.g., music streaming: ad-supported, ad-free accounts, family plans)
• Cross-subsidization is a revenue strategy
7. Whom to charge?
7
Subsidizer Sibsidizee
Price elasticity low high
Marginal cost of growing
Same-side network externality
Multi-homing and switching costs
Easiness of collecting fees
Decision „rules“
• Price elasticity/sensitivity
• Charge more from the side with lower
price elasticity
• -”if they care less about money, charge
them more”
• Examples:
• C2C marketplaces:
Sellers subsidize buyers
• Job searching websites:
Companies subsidize applicants
• Search engines?
8. Whom to charge?
8
Subsidizer Sibsidizee
Price elasticity low high
Marginal cost of growing high low
Same-side network externality
Multi-homing and switching costs
Easiness of collecting fees
Decision „rules“
• The marginal cost of growing of a side is the
additional operating cost needed to serve one
more user at that side.
• E.g., in C2C marketplaces
• Adding a buyer -> Marginal cost of
growing is almost 0
• Adding a seller -> What are the marginal
cost of growing?
• A platform should charge more from the side
with a higher marginal cost of growing
On social networking sites users are typically
subsidized to join for free. Who subsidizes them?
9. Whom to charge?
9
Subsidizer Sibsidizee
Price elasticity low high
Marginal cost of growing high low
Same-side network externality negative or weak strong
Multi-homing and switching costs
Easiness of collecting fees
Decision „rules“
• When one side exhibits positive same-side
network externality, existing users bring in
new users.
• E.g., instant messengers
• A platform should charge less from the side
with a strong positive same-side network
externality
Who subsidizes users to feely use instant
messengers?
10. Whom to charge?
10
Subsidizer Sibsidizee
Price elasticity low high
Marginal cost of growing high low
Same-side network externality negative or weak strong
Multi-homing and switching costs high low
Easiness of collecting fees
Decision „rules“
• When a user has multiple platforms to join:
• The multi-homing cost is paid to use
multiple platforms simultaneously
• The switching cost is paid to leave one
platform and switch to another one.
• A platform should charge more from the side
with higher multi-homing and switching
costs.
• Otherwise the users will go away
• E.g. eBay charges more from sellers to
subsidize buyers.
Why sellers on eBay have relatively high multi-
homing and switching costs?
11. Whom to charge?
11
Subsidizer Sibsidizee
Price elasticity low high
Marginal cost of growing high low
Same-side network externality negative or weak strong
Multi-homing and switching costs high low
Easiness of collecting fees high low
Decision „rules“
• Sometimes thigs are simple:
it may be too costly to charge a side.
• C2C marketplaces:
It is easier to collect fees from sellers or
buyers?
• Search engines: Is it easier to collect fees
from advertisers or searchers?
• A platform should charge more from the side
that is easier to collect fees from.
12. Whom to charge?
12
Subsidizer Sibsidizee
Price elasticity low high
Marginal cost of growing high low
Same-side network externality negative or weak strong
Multi-homing and switching costs high low
Easiness of collecting fees high low
Decision „rules“
13. Case 1: Online Reading Platforms
13
• Online reading revolutionized the publishing
industry
• Two sides: Authors and readers
• Publishers?
• Here are some cash flows:
Readers
Novel Platform
Authors
Buy novels Free registration
Revenue
sharing
Listing fee?
14. Case 1: Online Reading Platforms
14
• Who should be subsidizer? Who should be subsidized? Why?
• Should the platform charge listing fee from the authors? Why?
• Are there any other possible revenue sources (besides advertisement)?
15. Case 2: Video Game Consoles
15
• Video game console manufacturers are all
platforms.
• Two sides: game developers and players
• Retailers?
• Here are some cash flows:
Players
Game Platform
Game developers
Buy games Buy consoles
Revenue
sharing
Pay
SDK Fee
16. Case 2: Video Game Consoles
16
• Who should be subsidizer? Who should be subsidized? Why?
• Do players have positive same-side network externality? Is it strong?
• Developers pay a lot to get the right to create games. Why not the opposite?
17. Case 3: Airbnb
17
• Airbnb is a two-sided platform
• Two sides: travelers and house owners
• Here are some cash flows:
• When the room price is $100, typically
• The traveler pays $106
• The house owner gets $97
Travelers
Airbnb
House owners
Book
rooms
Pay service fees
Revenue
sharing
Free
registration
18. Case 3: Airbnb
18
• Which side should be subsidized? Why?
• Why both sides are paying?
19. Dr. Paul Marx | How Advancements in Technlogy Influence Markeitng: NLP
RF CPFATJVF
19
20. Dr. Paul Marx | How Advancements in Technlogy Influence Markeitng: NLP
RF CPFATJVF
20
This presentation is based on the course „Platform strategy“ by Prof. Ling-Chieh Kung of National Taiwan University