Platform Competition, Compatibility, and Social Efficiency
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.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Novshek, William, 1980. "Equilibrium in simple spatial (or differentiated product) models," Journal of Economic Theory, Elsevier, vol. 22(2), pages 313-326, April.
- David A. Malueg & Marius Schwartz, 2006. "COMPATIBILITY INCENTIVES OF A LARGE NETWORK FACING MULTIPLE RIVALS -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 54(4), pages 527-567, December.
- Economides, Nicholas, 1989. "Desirability of Compatibility in the Absence of Network Externalities," American Economic Review, American Economic Association, vol. 79(5), pages 1165-81, December.
- Jean‐Charles Rochet & Jean Tirole, 2006.
"Two‐sided markets: a progress report,"
RAND Journal of Economics,
RAND Corporation, vol. 37(3), pages 645-667, 09.
- David Evans & Richard Schmalensee, 2007.
"The Industrial Organization of Markets with Two-Sided Platforms,"
Competition Policy International, vol. 3.
- David S. Evans & Richard Schmalensee, 2005. "The Industrial Organization of Markets with Two-Sided Platforms," NBER Working Papers 11603, National Bureau of Economic Research, Inc.
- Mark Armstrong, 2006.
"Competition in two‐sided markets,"
RAND Journal of Economics,
RAND Corporation, vol. 37(3), pages 668-691, 09.
- repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
- Andrei Hagiu, 2009. "Two-Sided Platforms: Product Variety and Pricing Structures," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(4), pages 1011-1043, December.
- repec:rje:randje:v:37:y:2006:3:p:720-737 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:net:wpaper:0832. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Nicholas Economides)
If references are entirely missing, you can add them using this form.