Platform Integration and Demand Spillovers in Complementary Markets: Evidence from Facebook’s Integration of Instagram
Management Science, Forthcoming
51 Pages Posted: 20 Jun 2014 Last revised: 23 Jul 2016
Date Written: June 9, 2014
Social media platform owners often choose to provide tighter integration with their own complementary applications (i.e., first-party applications) as compared to that with other complementary third-party applications. We study the impact of such integration on consumer demand for first-party applications and competing third-party applications by exploring Facebook’s integration of Instagram in its photo-sharing application ecosystem. We find that consumers obtain additional value from Instagram after its integration with Facebook, leading to a large increase in the use of Instagram for Facebook photo-sharing. Further, we find that the growth of Instagram’s user base has a positive spillover effect on big third-party applications and a negative spillover effect on small third-party applications in Facebook’s photo-sharing ecosystem. As a result, while small third-party applications face reduced demand post-integration, big third-party applications experience a small increase in demand due to Facebook’s integration of Instagram. Thus, the overall demand for the entire photo-sharing application ecosystem actually increases, which suggests that Facebook’s integration strategy benefits the complementary market overall. Our results highlight the role of platform integration for first-party applications and the application ecosystem overall, and have implications for strategic management of first-party applications in the presence of third-party applications.
Keywords: platform, first-party application, third-party application, demand spillovers, network effect
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