The option value in complements within platform‐based ecosystems

Puay Khoon Toh and Shiva Agarwal

Strategic Management Journal, 2023, vol. 44, issue 2, 576-609

Abstract: Research Summary Within platform‐based ecosystems, what drives platform owners' investment decision to enable third‐party complements onto their platforms? Departing from the conventional focus on the complementarity value that these complements add to platform owners, we examine how uncertainty in the complementary product market drives this decision. We offer a novel perspective on third‐party complements—they contain option value allowing the platform owner to defer its own entry into the market. Thus, uncertainty increases investment in enabling complements, especially with greater “downside risk” in the market or learning‐by‐observing. We demonstrate this perspective using numerical examples, simulations, and data on Apple's iPhone ecosystem from 2010 to 2015. This perspective brings together literatures on complementarity value and entry into the complementary market, and indicates that complements generate more than complementarity value within platform‐based ecosystems. Managerial Summary To manage complements within a platform‐based ecosystem, the platform owner needs to understand how complements add value. Conventionally, complements are seen to render the platform more attractive. We offer a different view—complements can be seen as real options for the platform owner to learn about the product‐market potential and decide later if it should enter the market with its own product. Using data from Apple's iPhone ecosystem, we demonstrate this option value and show that it is salient when “downside risk” of the market is high or learning‐by‐observing is possible. Our analysis suggests that without considering such option value, platform managers may have underestimated the value‐add of complements on their platforms. Our findings also contribute to recent discussions about platform owners' entry into third‐party spaces.

Date: 2023
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