Intertemporal Price Competition in the Two-Sided Market: Reexamining the Seesaw Principle for Startup Platforms

Abstract

Pricing represents a crucial element in the platform business model search, particularly for startups that face the “cold-start” problem in launching a two-sided marketplace. In a static setting, the literature recommends the “seesaw principle” (i.e., charging a relatively low price, even subsidizing, on the one side and a high price on the other) as the solution. However, little is known about whether the seesaw principle still works in a dynamic setting and how it is influenced by intertemporal factors such as retention capabilities and early period financial pressure. This paper develops a game-theoretic model to examine optimal pricing strategies in a multiperiod setting. We first show that, in the symmetric scenario, the adjustment to the seesaw principle (i.e., the difference between the single- and multiperiod price gaps) increases with the platforms’ retention rate. This insight holds true in the asymmetric case where a startup platform faces greater early period financial pressure than an established competitor. Interestingly, the startup platform should charge a higher price to the less profitable side to differentiate itself and avoid a price war. We also explore the robustness of these insights by considering an endogenous, price-sensitive retention rate.