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Frenemies in Platform Markets: Heterogeneous Profit Foci as Drivers of Compatibility Decisions

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  • Ron Adner

    (Tuck School of Business, Dartmouth College, Hanover, New Hampshire 03755)

  • Jianqing Chen

    (Jindal School of Management, The University of Texas at Dallas, Richardson, Texas 75080)

  • Feng Zhu

    (Harvard Business School, Harvard University, Boston, Massachusetts 02163)

Abstract

We study compatibility decisions of two competing platform owners that generate profits through both hardware sales and royalties from content sales. We consider a game-theoretic model in which two platforms offer different standalone utilities to users. We find that incentives to establish one-way compatibility—the platform owner with smaller standalone value grants access to its proprietary content application to users of the competing platform—can arise from the difference in their profit foci. As the difference in the standalone utilities increases, royalties from content sales become less important to the platform owner with greater standalone value, but more important to the other platform owner. One-way compatibility can thus increase asymmetry between the platform owners’ profit foci and, given a sufficiently large difference in the standalone utilities, yields greater profits for both platform owners. We further show that social welfare is greater under one-way compatibility than under incompatibility. We also investigate how factors such as exclusive content and hardware-only adopters affect compatibility incentives.

Suggested Citation

  • Ron Adner & Jianqing Chen & Feng Zhu, 2020. "Frenemies in Platform Markets: Heterogeneous Profit Foci as Drivers of Compatibility Decisions," Management Science, INFORMS, vol. 66(6), pages 2432-2451, June.
    • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:6:p:2432-2451
    DOI: 10.1287/mnsc.2019.3327
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    References listed on IDEAS

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