Platform Pricing and Investment to Drive Third-Party Value Creation in Two-Sided Networks

Many two-sided platforms, such as eBay, iOS, Android, and Twitter, invest in developer integration tools, such as modular interfaces, interactive development environments, application programming interfaces, and help desks, in order to reduce the cost and improve the functionality of third-party content developed for the platform. Although these integration tools are crucial to platform success, they are costly to create, and therefore, managers need to understand where and when to deploy them. In particular, when the necessary integration investment is high, the advice to subsidize one side of a two-sided market while charging the other may not hold. This means that integration investment should be carefully coordinated with market pricing decisions. In general, higher levels of investment by hardware/software platforms into integration become desirable when the platform (1) has access to a large pool of content providers and consumers, (2) is able to develop integration tools that are highly effective in reducing third-party development costs, and (3) operates in high-consumer value markets. However, there are nuances. For example, business to business platforms can make investments in integration to facilitate participation by both sides of the market. We find that such investments are complements, not—as one might expect—substitutes. Many two-sided platforms (for example, eBay, Google, iOS, Android, Twitter, and Amazon) provide integration tools, such as modular interfaces, interactive development environments, application programming interfaces, and help desks, to reduce the costs and improve the functionality of third-party content developed for the platform. The need for such investment is increasing with the rise of major new markets as the result of technologies, such as the “Internet of Things.” Although crucial to platform success, platform integration tools are costly to create. We develop an analytic model to explore the key tradeoffs behind investment in integration tools and how that investment interacts with pricing decisions in a two-sided market. We model these decisions for hardware/software platforms as well as hybrid retail platforms and analyze them under various scenarios, including monopoly and competition. Our results suggest that considering integration investment can create market regimes in which the standard pricing results from the extant platform literature no longer hold. For example, the tendency to reduce prices to one sid