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

Management science, 2020-06, Vol.66 (6), p.2432-2451 [Peer Reviewed Journal]

COPYRIGHT 2020 Institute for Operations Research and the Management Sciences ;Copyright Institute for Operations Research and the Management Sciences Jun 2020 ;ISSN: 0025-1909 ;EISSN: 1526-5501 ;DOI: 10.1287/mnsc.2019.3327

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  • Title:
    Frenemies in Platform Markets: Heterogeneous Profit Foci as Drivers of Compatibility Decisions
  • Author: Adner, Ron ; Chen, Jianqing ; Zhu, Feng
  • Subjects: Automobile industry ; Compatibility ; Computer software industry ; Corporate profits ; Decision making models ; frenemies ; Grants ; Hardware stores ; Incentives ; Markets ; Mathematical models ; Owners ; platform competition ; profit foci ; Profits ; Royalties ; Sales ; Social networks ; Social welfare
  • Is Part Of: Management science, 2020-06, Vol.66 (6), p.2432-2451
  • Description: 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. This paper was accepted by Chris Forman, information systems.
  • Publisher: Linthicum: INFORMS
  • Language: English
  • Identifier: ISSN: 0025-1909
    EISSN: 1526-5501
    DOI: 10.1287/mnsc.2019.3327
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