Platform competition, compatibility, and social efficiency

This article considers systems compatibility when competing platforms are two-sided and there are indirect network externalities to develop an explanation why markets with two-sided platforms are often characterized by incompatibility with one dominant player who may subsidize access to one side of the market. Speci fically, we model competitive interaction between two providers of horizontally differentiated platforms that act as intermediaries between developers of platform-based products (applications) and users of such products. We find that the unique equilibrium under platform compatibility leads to higher pro ts than the symmetric equilibrium under incompatibility. Notwithstanding, incompatibility naturally gives rise to asymmetric equilibria with a dominant platform that captures all users and earns more than under compatibility. Our model allows a detailed analysis of social efficiency. We find that entry by developers is socially excessive (insufficient) if competing platforms are compatible (incompatible) and that incompatibility generates larger total welfare than compatibility when horizontal differences between platforms are small.

Casadesus-Masanell, R. and Ruiz-Aliseda, F. (2008), Platform Competition, Compatibility, and Social Efficiency, No. 8-32, NET Institute.

Metadata

  • Research publication
  • Other
  • Yes
  • no specific sector focus
  • Sector aspects, competition, lobbying
  • English
  • NET Institute (Publisher)
  • Qualitative research
  • 2008
  • Subscription
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