Dynamic price competition and promotion strategy with cross-network effect: Implications for e-commerce platforms

This paper explores a dynamic Bertrand competition between standard and premium e-commerce platforms with cross-network effect. We construct a two-period model in which platforms decide whether to adopt promotion in the first period, and the platforms’ decisions result in four scenarios. Our model illustrates that the platforms’ price competition in the first period is always fiercer than in the second period with the presence of a cross-network effect when no platform adopts promotion. Moreover, the first-period price competition could be weakened after introducing the promotion strategy. Intuitively, platforms want to make positive profits from promotions. Interestingly, we find that (1) the promotion-period profit of the platform could be negative, and (2) when both platforms A and B adopt the promotion strategy, at most one platform’s promotion-period profit can be negative. Meanwhile, we show that high marginal promotion cost deters both premium platform A and standard platform B from adopting promotions, while lower cost leads both or only one platform to engage in promotion. Finally, our analysis reveals that endogenous promotion strategies prevent platforms from falling into a prisoner’s dilemma.