A co-opetitive game analysis of platform compatibility strategies under data security regulation

Collaboration between large and small-scale two-sided platforms has given rise to a new business mode known as platform compatibility. Large-scale platforms (LSPs), capitalizing on their valuation and awareness advantages, have been increasingly integrating competing small-scale platforms (SSPs) into their own interface, creating a compatible channel for consumers to access SSP services. However, the amplified data volume and inter-platform data exchange in this compatible mode increase the likelihood of data breaches, necessitating urgent and effective regulatory measures from the government to mitigate the associated data security risks In this study, we develop stylized game models to characterize the strategic interaction between an LSP and an SSP, and investigate the impact of government regulation on platforms’ blockchain-based defense efforts and pricing strategies. The main findings are as follows: (1) The compatibility decisions of the two platforms are contingent upon the proportion of SSP users purchasing their services through the compatible channel. (2) The efficacy of government regulation on data security does not necessarily maximize social welfare. The penalty schemes benefit social welfare only if consumers are highly sensitive to data security. (3) Government regulation incentivizes platforms to enhance their blockchain-based defense efforts, thereby mitigating the data breach risks associated with the compatible mode and amplifying the advantages of such a collaborative mode. Our results provide important implications to the burgeoning debate on when and how the government should formulate the data security regulation policy under both compatible and incompatible modes.