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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/29489
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| Title: | Platform Competition, Compatibility, and Social Efficiency |
| Authors: | Casadesus-Masanell, Ramon - Harvard Business School
Ruiz-Alisedaz, Francisco - Universitat Pompeu Fabra |
| Keywords: | Two-sided Platforms, Compatibility, Incompatibility, Network
Externalities, rket Dominance, Tipping, Pricing Structure, Social Efficiency |
| Issue Date: | 2008 |
| Series/Report no.: | Net Institute Working Paper;08-32 |
| Abstract: | In their seminal 1985 paper, Katz and Shapiro study systems
compatibility in settings with one-sided platforms and direct network
externalities. We consider 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. Specifically, 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 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. 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. |
| URI: | http://hdl.handle.net/2451/29489 |
| Appears in Collections: | NET Institute Working Papers Series
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