Game of Platforms: Strategic Expansion into Rival (Online) Territory

Abstract

Online platforms, such as Google, Facebook, or Amazon, are constantly expanding their activities, while increasing the overlap in their service offering. This paper asks, is expansion into rival platforms’ services profit-maximizing when users’ platform choices endogenously change with expansion? We model an expansion game between two online platforms, both incumbents in distinct service markets, providing their services for free to users, and earning ad-based revenues. Platforms decide whether or not to expand by adding the service already offered by the rival. Expansion is costly, and impacts users’ platform choice, namely, their choice of single- vs. multi-homing, which, in turn, affects platform prices and profits derived from the advertisers’ side of the market. We demonstrate that, in equilibrium, platforms may choose not to expand. Strategic "no expansion" decisions are due to the quantity and price effects of changes in the user partition resulting from expansion. We further analyze the effects of expansion-driven changes in inter-platform compatibility, expansion costs, users’ probability of ad-engagement, switching costs, and intra-platform service complementarity and quality on the optimal expansion strategy. We derive an optimal expansion rule, incorporating these considerations, to guide managerial decision making regarding expansion into a rival’s “territory.”

Keywords: Media economics, entry, online platforms, two-sided markets

JEL Classification: D43, L10, L41