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Pricing models of two-sided markets incorporating service quality

Zhaojie Xue (Department of Transportation Engineering, College of Civil Engineering, Shenzhen University, Shenzhen, China)
Shuqing Cheng (Department of Transportation Engineering, College of Civil Engineering, Shenzhen University, Shenzhen, China)
Mingzhu Yu (Department of Transportation Engineering, College of Civil Engineering, Shenzhen University, Shenzhen, China)
Liang Zou (Department of Transportation Engineering, College of Civil Engineering, Shenzhen University, Shenzhen, China)

Kybernetes

ISSN: 0368-492X

Article publication date: 3 December 2018

Issue publication date: 23 September 2019

Abstract

Purpose

This paper aims to study the pricing problems on the two-sided market for cases of monopoly and duopoly competition, specifically investigating the impact of platform service quality on the market. Theoretical analysis and computational studies are conducted to investigate the impact of different parameters on the system outcomes.

Design/methodology/approach

Mathematical formulations are proposed for cases of monopoly and duopoly competition. For monopolistic market, the optimal pricing and service quality strategies are obtained using mathematical programming method. For duopolistic market, the equilibrium outcomes are derived by game theory. Sensitivity analysis and numerical studies are also adopted to investigate the impact of different parameters.

Findings

For monopolistic market, the platform will provide a low service quality when the service cost parameter is large. However, when the cost parameter is small, the platform provides a higher service quality and higher registration prices. Furthermore, the sum of the optimal prices is proportional to the service quality and inversely proportional to the user price sensitivity. For duopolistic market, the competitive equilibrium prices exist under a certain condition. The determinants of equilibrium prices are the gap between the service qualities of two platforms and the cross-group externalities.

Originality/value

For monopolistic market, this paper specifies the role of platform service quality in determining the platform’s pricing strategy. For duopolistic market, this paper presents a market sharing mechanism between two platforms and explores the equilibrium pricing strategies for platforms with different service quality level.

Keywords

Acknowledgements

The work is supported by the National Natural Science Foundation of China under Grant No. 71502112, Shenzhen Municipal Science and Technology Innovation Committee under Grant No. JCYJ20170302144108956, and Natural Science Foundation of SZU under Grant No. 000154.

Citation

Xue, Z., Cheng, S., Yu, M. and Zou, L. (2019), "Pricing models of two-sided markets incorporating service quality", Kybernetes, Vol. 48 No. 8, pp. 1827-1850. https://doi.org/10.1108/K-06-2018-0287

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited