Limiting Compatibility in Two-sided Markets

Miao, Chun‐Hui

doi:10.2202/1446-9022.1184

Cited by 20 publications

(10 citation statements)

References 17 publications

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“…Lastly, the set-up of a dominant platform provider also excludes possible competition effects. In particular, the mode of competition (e.g., Cournot vs Stackelberg) or the phase in the life cycle (e.g., in References [19,31]) will affect the degree of the backward compatibility, thereby making the level determined endogenously. Thus, our future works will proceed along a couple of directions for extending the current model.…”

Section: Discussionmentioning

confidence: 99%

“…Reference [30] extends the frameworks of [27,28], and provides a stylized model for compatibility mode choice ("compatibility regime" in their term) to explain how the mode choice depends on some characteristics (e.g., interdependence of installed bases and market growth rate) of the two-sided markets. Reference [31] deals with a monopoly platform in a two-sided market, which has an incentive to maintain incompatibility for foreclosing competition in its complementary market. Reference [32] also extends the scheme of planned obsolescence [28] to the two-sided markets.…”

Section: Two-sided Market and Compatibility: Literature Review And Oumentioning

confidence: 99%

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Equilibrium Analysis for Platform Developers in Two-Sided Market with Backward Compatibility

Kim

2018

Games

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We consider a dominant platform provider operating both legacy and new platforms that connects users with suppliers in a two-sided market context. In addition to the typical indirect network effects in the two-sided market, backward compatibility works on the new platform. Thus, users joining the new one can also enjoy the services provided by suppliers using the legacy platform. Users and suppliers are linearly differentiated between two platforms as in the Hotelling model and play a subscription game of choosing one platform at the lower level. The suppliers in the new platform may suffer from congestion, which can be alleviated by platform provider’s investment on the new one. The platform provider also determines price margins for the supplier sides. Our equilibrium (eq.) analysis in the subscription game identifies an interior eq. (coexistence of both platforms in both sides). Though the backward compatibility plays a stabilizing role for the interior eq., its stability is fragile due to the network effects. Rather, some boundary eq.’s, where at least one side tips to the legacy or the new platform, are more likely to be stable. The backward compatibility is a key factor that characterizes the stable boundary eq.’s. The upper stage game is led by the platform provider, which tries to maneuver the system toward one of the stable boundary eq.’s using price margins and investment. The platform provider prefers an all-new boundary eq. when the indirect network effect and the maximum price margin for the new platform are large; thus, it puts a significant investment in the new one. With a small indirect network effect for suppliers, however, the platform provider does not invest in the new platform and choose a separate boundary eq. where two sides split into different platforms. Whether the user side completely tips to the new one (completely separated eq.) or not (partially separated eq.) depends on the backward compatibility. The relative advantage of the all-new eq. over the separate eq.’s in terms of social welfare from both sides depends on the backward compatibility as well as the indirect network effects for the new platform.

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Section: Discussionmentioning

confidence: 99%

Section: Two-sided Market and Compatibility: Literature Review And Oumentioning

confidence: 99%

Equilibrium Analysis for Platform Developers in Two-Sided Market with Backward Compatibility

Kim

2018

Games

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“…In this case, the positive welfare effect due to increased monopoly supply may be offset by the negative effect from the lower quality in B 2 and therefore the overall effect will depend on the parameter values. This means that the welfare property of incompatibility can potentially be reversed in the absence of monopoly undersupply, as is the case in Miao (2009), which studies a model with competing suppliers and finds that a dominant firm's incentive to foreclose its complementors in two-sided markets can be privately optimal but socially harmful. Therefore, the welfare comparisons made in this paper, while informative, must be applied with careful attention to the market structure and model parameters.…”

Section: Quality Change In Component Bmentioning

confidence: 99%

Planned obsolescence and monopoly undersupply

Miao

2011

Information Economics and Policy

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“…19 The monotonicity criterion is (trivially) satisfied in the unique symmetric equilibrium under compatibility derived in Section 3.…”

mentioning

confidence: 96%

Platform Competition, Compatibility, and Social Efficiency

Casadesus-Masanell¹,

Ruiz‐Aliseda²

2009

SSRN Journal

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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.

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Limiting Compatibility in Two-sided Markets

Cited by 20 publications

References 17 publications

Equilibrium Analysis for Platform Developers in Two-Sided Market with Backward Compatibility

Equilibrium Analysis for Platform Developers in Two-Sided Market with Backward Compatibility

Planned obsolescence and monopoly undersupply

Platform Competition, Compatibility, and Social Efficiency

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