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Academic Lecture: Dynamic Platform Competition: Optimal Subsidizing Strategies
2015-12-2
TIME: 10:15-11:45, Dec. 2nd, 2015
VENUE: Room 335, School of Economics & Management
SPEAKER: Dr. DOU Yifan, Fudan University
ABSTRACT: Platforms frequently employ subsidizing strategies to attract users (e.g., consumers) on one side in order to profit more from the other side (e.g., content providers) via cross-side network effects. Despite its importance in business practice, the academic literature is rare on optimal subsidizing strategies under dynamic platform competition. This paper aims to address this research question using a stylized game-theoretic model.First, we extend the single-period duopoly platform competition model in the literature to a two-period setting. We identify conditions when optimal subsidizing strategies in the single-period model carry through in the two-period setting, and more importantly, when not. In particular, we show that under symmetric duopoly, when the second period discount factor exceeds a certain threshold, subsidizing the consumer side in period 1 becomes optimal. This is new and contrasts sharply to the single-period model finding in the literature where subsidizing consumers is not optimal. Second, we investigate a new setting of asymmetric duopoly where one platform (called the incumbent) is endowed with an initial installed base on the consumer side. For example, the incumbent may employ the ``platform envelopment'' strategy by redirecting her existing customers into the new market in order to compete with her rival platform (called the startup). We investigate the impact of such an initial installed base on each platform's optimal subsidizing strategies. We are particularly interested in the startup's strategies when competing against such an incumbent. We identify regions when the startup should subsidize more, and more importantly, when less. For example and somewhat counter intuitively, so long as the network effects are not too strong, the startup does not need to extensively subsidize the consumer side in responding to a larger initial installed base of the incumbent.
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