The Effects of Compatibility on Competition between Proprietary and Open Two-Sided Platforms

16 Pages Posted: 7 May 2008

See all articles by Wafa Hakim Orman

Wafa Hakim Orman

University of Alabama in Huntsville - College of Business

Date Written: 3/28/2008

Abstract

Markets for operating systems are classic two-sided platforms, where the users of the operating system must purchase applications from application developers, but neither side internalizes the welfare impact of their adoption of the platform on the other side. Studies of competition and compatibility between two-sided platforms have tended to focus on cases where both platforms are owned by profit-maximizing firms. This paper specifically focuses on the effects of competition and compatibility between a profit-maximizing, or proprietary platform and an open, freely accessible platform. Under certain conditions, compatibility (meaning applications developed for one platform can be used on the other) can in fact be a profitable strategy even for a proprietary platform, and can benefit developers on both platforms. It also unambiguously improves social welfare in some cases, and there are cases where compatibility is welfare-improving but the proprietary platform has no incentive to invest in it.

Keywords: two sided platforms, proprietary, open source, hotelling, compatibility, competition

JEL Classification: L11, L13

Suggested Citation

Orman, Wafa Hakim, The Effects of Compatibility on Competition between Proprietary and Open Two-Sided Platforms (3/28/2008). Available at SSRN: https://ssrn.com/abstract=1129275 or http://dx.doi.org/10.2139/ssrn.1129275

Wafa Hakim Orman (Contact Author)

University of Alabama in Huntsville - College of Business ( email )

United States

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