Compatibility Choices, Switching Costs, and Data Portability

Abstract

We study mix-and-match compatibility choices of firms selling complementary products in a dynamic setting. Contrary to what happens in a static setting where symmetric firms choose compatibility (Matutes and Regibeau 1988), when switching costs are high and firms make price discrimination based on past purchases, symmetric firms choose incompatibility to soften future competition if the discount factor is large, which harms consumers. Interoperability increases consumer surplus at least for high switching costs. Data portability, by reducing switching costs, induces the firms to choose compatibility more often but, given a compatibility regime, benefits consumers only if a nonnegative pricing constraint binds. (JEL D11, D21, D43, D82, L86)

Platform design biases in ad‐funded two‐sided markets

“…When the marginal cost is low or even zero as in the digital markets, this implies that the optimal price can be negative. However, negative prices can invite opportunistic behaviors by consumers due to various moral hazard and adverse selection reasons (Farrell and Gallini, 1988, Armstrong and Wright, 2007, Amelio and Jullien, 2012, Choi and Jeon, 2021and Jeon et al, 2023. 5 In such a scenario, negative prices are impractical and the platform is constrained to set the price at zero.…”

“…Our article contributes to the recently emerging literature on platform design that has studied the incentives of digital platforms on various key issues of governance as a gatekeeper. They include incentives to delist low-quality sellers (Casner, 2020) or IP-infringing sellers (Jeon et al, 2021), to curate apps (Etro, 2021), to introduce deceptive features (Johnen and Somogyi, 2021), to choose the intensity of seller competition (Johnson et al, 2021;Teh, 2022), and to moderate content (Liu et al, 2022;Madio and Quinn, 2021) among others. 3 Our article is most closely related to Teh (2022) and Etro (2021).…”