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Platform Integration and Demand Spillovers in Complementary Markets: Evidence from Facebook’s Integration of Instagram

Author

Listed:
  • Zhuoxin Li

    (Carroll School of Management, Boston College, Chestnut Hill, Massachusetts 02467)

  • Ashish Agarwal

    (McCombs School of Business, University of Texas at Austin, Austin, Texas 78712)

Abstract

Social media platform owners often choose to provide tighter integration with their own complementary applications (i.e., first-party applications) as compared to that with other complementary third-party applications. We study the impact of such integration on consumer demand for first-party applications and competing third-party applications by exploring Facebook’s integration of Instagram, an application in its photo-sharing application ecosystem. We find that consumers obtain additional value from Instagram after its integration with Facebook, leading to a large increase in the use of Instagram for Facebook photo sharing. Further, we find that the growth of Instagram’s user base has a positive spillover effect on big third-party applications and a negative spillover effect on small third-party applications in Facebook’s photo-sharing ecosystem. As a result, while small third-party applications face reduced demand after integration, big third-party applications experience a small increase in demand. Thus, the overall demand for the entire photo-sharing application ecosystem actually increases, which suggests that Facebook’s integration strategy benefits the complementary market overall. Our results highlight the role of platform integration for first-party applications and the application ecosystem overall, and they have implications for strategic management of first-party applications in the presence of third-party applications.

Suggested Citation

  • Zhuoxin Li & Ashish Agarwal, 2017. "Platform Integration and Demand Spillovers in Complementary Markets: Evidence from Facebook’s Integration of Instagram," Management Science, INFORMS, vol. 63(10), pages 3438-3458, October.
    • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:10:p:3438-3458
    DOI: 10.1287/mnsc.2016.2502
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