Impact of Platform Exclusive Agreements: Differentiated Pricing and Traffic Control

Abstract

With continuous innovation in Internet technology, platform-based enterprises are rapidly emerging as key players across various industries. However, due to their high market position and information advantages, some of these enterprises may potentially establish exclusive agreements, posing damage to market competition fairness and consumer utilities. In this study, we build on a Hotelling model to develop a duopoly platform competition model that consists of consumers, platforms, and merchants. We focus on examining the impacts of the dominant platform imposing exclusive agreements on merchants and consumers. The findings indicate that merchant switching costs and cross-side network effects are crucial factors influencing platform pricing strategies. Based on these, in different scenarios, the platform will flexibly make the decision regarding increasing or decreasing the consumer service fee rate to achieve the goals of profit maintenance or market preemption. Furthermore, when the dominant platform utilizes a differentiated pricing strategy, the competing platform can adjust its pricing strategy accordingly to maintain profitability. However, if the dominant platform implements a traffic control strategy, the competing platform is unable to offset the decrease in market size through price adjustments, resulting in a loss of profits. Last, we identify that platform-exclusive agreements always have a negative impact on consumer utilities. Moreover, when merchant transfer costs are high, compared with the differentiated pricing strategy, the dominant platform's implementation of traffic control strategies will seriously damage the merchant utilities.