Platform Competition, Compatibility, and Social Efficiency

53 Pages Posted: 22 Oct 2008 Last revised: 3 Nov 2009

See all articles by Ramon Casadesus-Masanell

Ramon Casadesus-Masanell

Harvard University - Strategy Unit

Francisco Ruiz-Aliseda

Pontifical Catholic University of Chile

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Date Written: October 1, 2008


In their seminal 1985 paper, Katz and Shapiro study systems compatibility in settings with one-sided platforms and direct network externalities. We consider systems compatibility when competing platforms are two-sided and there are indirect network externalities 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. Speci fically, we model competitive interaction between two providers of horizontally di fferentiated platforms that act as intermediaries between developers of platform-based products (applications) and users of such products. We find that the unique equilibrium under platform compatibility leads to higher pro ts than the symmetric equilibrium under incompatibility. Notwithstanding, incompatibility naturally gives rise to asymmetric equilibria with a dominant platform that captures all users and earns more than under compatibility. Our model allows a detailed analysis of social efficiency. We find that entry by developers is socially excessive (insufficient) if competing platforms are compatible (incompatible) and that incompatibility generates larger total welfare than compatibility when horizontal di fferences between platforms are small.

Keywords: Two-sided Platforms, Incompatibility, Network Externalities, Market Domi-

JEL Classification: L11, L15, L40

Suggested Citation

Casadesus-Masanell, Ramon and Ruiz-Aliseda, Francisco, Platform Competition, Compatibility, and Social Efficiency (October 1, 2008). NET Institute Working Paper No. 08-32. Available at SSRN: or

Ramon Casadesus-Masanell (Contact Author)

Harvard University - Strategy Unit ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
617-496-0176 (Phone)
617-496-5859 (Fax)


Francisco Ruiz-Aliseda

Pontifical Catholic University of Chile ( email )

Vicuna Mackenna 4860
Santiago, 99999

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