Optimal Bundling of Platform Memberships Under Horizontal Cooperation

Abstract

For two-sided platforms, the utility of users on one side of the platform depends in part on the number of users on the other side of the platform, a phenomenon called indirect network externalities. With the rapid development of two-sided platform and the popularity of platform membership, more and more two-sided platforms have launched joint membership through horizontal cooperation in order to take advantage of indirect network externalities to increase platform profits.

Our study explores the optimal bundling strategy for platform memberships under horizontal cooperation considering indirect network externalities. The main purpose of our study is to obtain the optimal pricing under different strategies (pure component, pure bundling, and mixed bundling) and contrast different strategies under different indirect network externalities.

Results suggest that the platform's optimal pricing for consumers and sellers depends on the indirect network externalities. Interestingly, the higher the indirect network externalities from consumers, the higher the price of the platform charges to sellers, and the platform might even subsidize sellers. Besides, when there are equal proportions of different types of consumers in the market, indirect network externalities that are too high, too low, or heavily lopsided may discourage the platforms from bundling their memberships. When the composition of consumers changes, the optimal strategy will also change. Our results can be employed in practical applications of bundling, which can help the platform increase profits.

Citation

Zhang, X., Yang, F., Hu, Y. and Huang, Z. (2022), "Optimal Bundling of Platform Memberships Under Horizontal Cooperation", Lawrence, K.D. and Pai, D.R. (Ed.) Applications of Management Science (Applications of Management Science, Vol. 21), Emerald Publishing Limited, Leeds, pp. 101-127. https://doi.org/10.1108/S0276-897620220000021009