Penetration or Skimming? Pricing Strategies for Software Platforms Considering Asymmetric Cross-Side Network Effects

Abstract

Considering a two-sided software platform with software developers on one side and software users on the other, we study whether the platform should adopt a penetration pricing strategy or skimming pricing strategy on the developer side. We propose a two-period analytical model with asymmetric cross-side network effects to analyze the platform’s optimal pricing strategy. Our analysis reveals that the platform should adopt a penetration pricing strategy if the user-to-developer network effect is strong and a skimming pricing strategy otherwise. If the platform does not charge users an access fee, the platform should consider subsidizing developers’ access in the first period only. However, when the platform charges users an access fee, subsidizing developers’ access in both periods can be viable for the platform. Charging the software user an access fee incentivizes the platform to subsidize developers in the first period if the user-to-developer network effect is weak. Finally, this study reveals that the optimal access fee charged or subsidy provided to developers in the two periods is determined by several key factors: developers’ basic expectations about the revenue to be gained from the platform (optimistic or pessimistic), intensities of cross-side network effects, the lengths of the two periods, and the access fee charged to users.