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Platform Competition, Compatibility, and Social Efficiency

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Abstract

In their seminal 1985 paper, Katz and Shapiro study systems compatibility in settings with one-sided platforms and direct network effects. We consider systems compatibility when competing platforms are two-sided and there are indirect network effects 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. Specifically, we model competitive interaction between two platform providers that act as intermediaries between developers of platform-based products (applications) and users of such products. We show that the unique equilibrium under platform compatibility leads to higher profits 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, and we show that entry by developers is socially excessive (insufficient) if competing platforms are compatible (incompatible). We conclude that while society would be better off if platforms were compatible, the quest for market dominance by competing platform providers prevents them from agreeing to a common standard.

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File URL: http://www.netinst.org/Casadesus-Masanell_Ruiz-Alisedaz_08-32.pdf
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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 08-32.

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Length: 50 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:net:wpaper:0832

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Web page: http://www.NETinst.org/

Related research

Keywords: Two-sided Platforms; Incompatibility; Network Externalities; Market Dominance; Tipping; Pricing Structure;

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Cited by:
  1. Sagit Bar-Gill, 2013. "Game of Platforms: Strategic Expansion in Two-Sided Markets," Working Papers 13-12, NET Institute.
  2. Hanna Halaburda & Yaron Yehezkel, 2013. "Platform Competition under Asymmetric Information," American Economic Journal: Microeconomics, American Economic Association, vol. 5(3), pages 22-68, August.

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