Platform Competition, Compatibility, and Social Efficiency

Ramon Casadesus-Masanell () and Francisco Ruiz-Aliseda
Additional contact information
Ramon Casadesus-Masanell: Harvard Business School, http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facEmId=rmasanell@hbs.edu

No 08-32, Working Papers from NET Institute

Abstract: 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.

Keywords: Two-sided Platforms; Incompatibility; Network Externalities; Market Dominance; Tipping; Pricing Structure (search for similar items in EconPapers)
JEL-codes: L11 L15 L40 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2008-10
New Economics Papers: this item is included in nep-com and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Platform competition, compatibility, and social efficiency (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:net:wpaper:0832

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