2008
Working Paper
HBS Working Paper Series

Platform Competition, Compatibility, and Social Efficiency

By: Ramon Casadesus-Masanell and Francisco Ruiz-Aliseda

Format:Print
| Language:English
| Pages:54

Abstract

Katz and Shapiro (1985) study systems compatibility in settings with one-sided plat- forms and direct network effects. We consider systems compatibility in settings with two-sided platforms and 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. We find that incompatibility gives rise to asymmetric equilibria with a dominant platform that earns more than under compatibility. We also find that incompatibility generates larger total welfare than compatibility when horizontal differences between platforms are small.

Keywords

Network Effects; One-Sided Platforms; Two-Sided Platforms; Competition

Citation

Casadesus-Masanell, Ramon, and Francisco Ruiz-Aliseda. "Platform Competition, Compatibility, and Social Efficiency." Harvard Business School Working Paper, No. 09-058, October 2008. (Revised November 2009.)