Two-Sided Platform Competition with Client Recognition

Client recognition, a practice that recognizes repeat and new clients from their purchase histories to price discriminate among them, is currently prevalent in the two-sided platform markets. This paper examines the impact of client recognition on pricing strategy, platform profitability, consumer surplus, and social welfare in a two-sided market characterized by cross-side network effects. Employing a two-period duopoly model with forward-looking game players, our findings reveal three novel effects of implementing client recognition that are unique to the two-sided market context. First, the adoption of client recognition will alter the intensity of cross-subsidization effects---the tendency that a platform lowers participation fees on one side to improve its attractiveness on the other side. Our results demonstrate that the cross-subsidization effects in the first period can be reduced or even eliminated when using client recognition on one side only, but reinforced when adopting client recognition on both sides. Second, we identify a cross-side competition relaxing effect of client recognition that the first-period price competition is mitigated on the side with client recognition so as to improve the second-period platform profits on the other side. Third, client recognition has a same-side competition intensifying effect because of the platforms' incentives of expanding their first-period market shares on the side with client recognition to enhance their second-period profits on the same side. Notably, our results further show that the joint influences of the second and third effects is primarily determined by the asymmetry of the cross-side network effects. Based on these effects, we establish the conditions under which the adoption of client recognition either hampers or enhances platform profitability. Overall, this study contributes to our understanding of the informational role of client recognition and its implications in two-sided platform markets