Government investment strategy and platform pricing decisions with the cross-market network externality

Abstract

Purpose

Considering the cross-market network externality, this paper aims to explore the platform’s pricing decisions and its optimal profit under the given government investment, and then investigate the investment decision to improve social responsibility, which is measured by the social welfare.

Design/methodology/approach

When exploring the optimal pricing decisions under the given government investment, extreme value theory and sensitive analysis are used. When investigating the investment level, game theory and optimization method are used. Numerical examples are conducted to further illustrate the results.

Findings

First, after considering the government investment, whether the buyers and the sellers are charged depends on the investment level and the difference of the cross-market network externality (CNC) of the sellers and the buyers. Second, the optimal price on the sellers is decreasing (increasing) in the CNC of the buyers (sellers). The optimal price on the buyers is significantly affected by the investment level. Finally, the government investment is win-win for both the platform and the government, and Chinese Government should invest on the sellers heavily.

Originality/value

This study specifies the role of the government investment on the sellers in determining the platform’s pricing decisions and the improvement of the social responsibility, which is measured by social welfare.

Citation

Xu, X., Dou, G. and Yu, Y. (2021), "Government investment strategy and platform pricing decisions with the cross-market network externality", Kybernetes, Vol. 50 No. 3, pp. 711-736. https://doi.org/10.1108/K-10-2019-0714