No abstract

T echnology platforms, such as Microsoft Windows, are the hubs of technology industries. We develop a framework to characterize the optimal two-sided pricing strategy of a platform firm; that is, the pricing strategy toward the direct users of the platform as well as toward firms offering applications that are complementary to the platform. We compare industry structures based on a proprietary platform (such as Windows) with those based on an open source platform (such as Linux), and analyze the structure of competition and industry implications in terms of pricing, sales, profitability, and social welfare. We find that, when the platform is proprietary, the equilibrium prices for the platform, the applications, and the platform access fee for applications may be below marginal cost, and we characterize demand conditions that lead to this. The proprietary applications sector of an industry based on an open source platform may be more profitable than the total profits of a proprietary platform industry. When users have a strong preference for application variety, the total profits of the proprietary industry are larger than the total profits of an industry based on an open source platform. The variety of applications is larger when the platform is open source. When a system based on an open source platform with an independent proprietary application competes with a proprietary system, the proprietary system is likely to dominate the open source platform industry both in terms of market share and profitability. This may explain the dominance of Microsoft in the market for PC operating systems.

This article analyzes the competition and integration among complementary products that can be combined to create composite goods or systems. The model generalizes the Cournot duopoly complements model to the case in which there are multiple brands of compatible components. It analyzes equilibrium prices for a variety of organizational and market structures that differ in their degree of competition and integration. The model applies to a variety of product networks including ATMs, real estate MLS, airlines CRS, as well as to non-network markets of compatible components such as computer CPUs and peripherals, hardware and software, and long distance and local telephone services.

We discuss network neutrality regulation of the Internet in the context of a two-sided market model. Platforms sell broadband Internet access services to residential consumers and may set fees to content and application providers on the Internet. When access is monopolized, cross-group externalities (network effects) can give a rationale for network neutrality regulation (requiring zero fees to content providers): there exist parameter ranges for which network neutrality regulation increases the total surplus compared to the fully private optimum at which the monopoly platform imposes positive fees on content providers. However, for other parameter values, network neutrality regulation can decrease total surplus. Extending the model to a duopoly of residential broadband ISPs, we again find parameter values such that network neutrality regulation increases total surplus suggesting that network neutrality regulation could be warranted even when some competition is present.

model of duopolistic competition ts re-examined. A family of utility functions is used which has as a special case Hotelling's original utility function. In a two-stage location-price game it is shown that an equilibrium exists when the curvature of the utility functions in the space of characteristics is sufficiently high. The (subgame-perfect) equilibrium never exhibits minimum product differentiation.On the other hand, not all equilibria are at maximal product differentiation.