Platform Competition with Complementary Products

Competition Policy and Antitrust and Networks, the Internet, and Cloud Computing

Article Snapshot

Author(s)

Juan D. Carrillo and Guofu Tan

Source

Working Paper, 2008

Summary

Competitive strategies of platform providers in the presence of complementary products.

Policy Relevance

The relative quality of platforms and the number of complementary products compatible with each platform are important factors for platform providers to design optimal competitive strategies. The platform provides have incentives to engage in exclusive contracts with independent complementary firms. However, competition among platforms helps consumers, so these insights may have implications in antitrust enforcement.

Main Points

  • Complementarity Effects: All firms in a platform group benefit from an increase in the platform quality and the number of complementors that adhere to it. At the same time, these firms suffer from an increase in the platform quality and in the number of complementors in the rival group. Therefore, both platforms have strong incentives to compete for the limited number of complementors available in the market.

  • Exclusivity: Each platform provider has incentives to sign exclusive agreements with each of its complementors, since such agreements increase the attractiveness of its own platform and reduces the attractiveness of the rival platform. The implications of exclusivity for consumer welfare depend on the degree of platform differentiation.

  • High-Definition DVD Market: The analysis is consistent with the recent battle between Sony and Toshiba for the new generation of high definition DVD standard.

  • Royalty vs. Subsidy: Platforms offer royalty or subsidy based on the elasticity of demand for complementary products.

  • Platform’s Ownership of Complementary Products. A platform has incentives to produce complementary products and make these available also to the customers of the rival platform (e.g., Microsoft Office Suite for Apple computers).

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