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

44 Pages Posted: 12 May 2015 Last revised: 25 Feb 2019

See all articles by Ron Adner

Ron Adner

Dartmouth College - Strategy & Management Area; Dartmouth College - Tuck School of Business

Jianqing Chen

The University of Texas at Dallas, Jindal School of Management

Feng Zhu

Harvard University - Harvard Business School

Date Written: February 15, 2019

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: frenemies; compatibility; platform competition; profit foci

Suggested Citation

Adner, Ron and Chen, Jianqing and Zhu, Feng, Frenemies in Platform Markets: Heterogeneous Profit Foci As Drivers of Compatibility Decisions (February 15, 2019). Forthcoming, Management Science; Harvard Business School Technology & Operations Management Unit Research Paper No. 15-087. Available at SSRN: https://ssrn.com/abstract=2605057 or http://dx.doi.org/10.2139/ssrn.2605057

Ron Adner

Dartmouth College - Strategy & Management Area ( email )

Hanover, NH
United States

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Jianqing Chen

The University of Texas at Dallas, Jindal School of Management ( email )

800 West Campbell Road
Richardson, TX 75080
United States

Feng Zhu (Contact Author)

Harvard University - Harvard Business School ( email )

Soldiers Field Road
Morgan 431
Boston, MA 02163
United States

HOME PAGE: http://www.hbs.edu/faculty/Pages/profile.aspx?facId=14938

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