Dynamic Two-Sided Pricing under Sequential Innovation

Technology innovation engenders products of higher qualities and reduces production costs. This paper focuses on a two-sided platform tied with quality-improving hardware devices that are introduced sequentially. We analyze a monopolist’s dynamic pricing strategies facing decreasing future production cost and strategic buyers. Findings in both the traditional (buyer-side only) and two-sided business models show that future cost reductions raise the optimal price of the present product, which shifts the buyer-side demand forward and mitigates intertemporal cannibalization. Furthermore, future cost reductions may also lead to a higher optimal price for the future product, given a substantial quality improvement. Thus, the monopolist may leverage future cost reductions to position its product line to the high-end market. By comparing the traditional and two-sided business models, we find that the impact of future cost reductions is more pronounced for a two-sided platform.