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.