||Cross-sided network effect is critical to platform based business models. In general, across a platform there’re two types of users, each sitting on one side of the platform. And the platform’s utility to any user in one side depends on the number of users (or the volume of usage generated by the users) in the other side. Under the discipline of micro-economy, cross-sided network effect is modeled and analyzed in the literature of “two-sided markets”. In this article, taking eWallet (electronically stored-value payment card) service as an example, we build a model of two-sided market, define and derive the utility functions for the platforms, and design a simulation to examine the price competition games in a duopoly market. We observe that, cross-sided network effect triggers variations in duopoly price games. By elaborating the business implication of these price game variants, we provide business intelligence for competing platforms in two-sided markets.|
Following the practice of game theory analysis, with our simulation we identify some famous game patterns such as prisoner’s dilemma, race-around, and varies boxed-pigs games. Depending on the game pattern presented, managers can develop their own co-opetition strategy by leveraging the existing business intelligence provided in the literature of game theory. By factoring price elasticity, churn rate, strength of network effect and market share distribution in our algebraic model, we also derive the optimized prices with which incumbents and entrants can maximize their revenue in cooperative and competitive business environments.
There’s a growing interest in platform based business models, in which cross-sided network effect plays an important role. Our work helps to provide strategic suggestion for fixed–transaction–fee platforms (such as eWallet), provide an systematic analysis methodology for platform based business models, and also provide a theoretic basics for further study in this critical area.