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  • June 2020
  • Article
  • Management Science

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

By: Ron Adner, Jianqing Chen and Feng Zhu
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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.

Keywords

Compatibility; Platform Competition; Profit Foci; Two-sided Platforms; Competition; Profit; Decision Making

Citation

Adner, Ron, Jianqing Chen, and Feng Zhu. "Frenemies in Platform Markets: Heterogeneous Profit Foci as Drivers of Compatibility Decisions." Management Science 66, no. 6 (June 2020): 2432–2451.
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About The Author

Feng Zhu

Technology and Operations Management
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More from the Authors

    • April 2021
    • Strategic Management Journal

    Homing and Platform Responses to Entry: Historical Evidence from the U.S. Newspaper Industry

    By: K. Francis Park, Robert Seamans and Feng Zhu
    • February 2021
    • Management Science

    Trust and Disintermediation: Evidence from an Online Freelance Marketplace

    By: Grace Gu and Feng Zhu
    • July 2020
    • Faculty Research

    Digital Platforms: An Introduction

    By: Chiara Farronato, Michael W. Toffel and Feng Zhu
More from the Authors
  • Homing and Platform Responses to Entry: Historical Evidence from the U.S. Newspaper Industry By: K. Francis Park, Robert Seamans and Feng Zhu
  • Trust and Disintermediation: Evidence from an Online Freelance Marketplace By: Grace Gu and Feng Zhu
  • Digital Platforms: An Introduction By: Chiara Farronato, Michael W. Toffel and Feng Zhu
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