NET Institute Working Paper #08-32, 2008
An explanation of why two-sided markets, like Microsoft’s Windows or Apple’s iTune, are often incompatible.
The last three decades have witnessed unprecedented growth in network industries such as video games, credit cards, computers, and media. This paper provides information on the organization of these industries, focusing on personal computer and digital music distribution.
- Platform incompatibility is selected by a large number of two-sided platform providers, because incompatibility naturally gives rise to a dominant platform that captures all users and earns more profits than compatibility.
- Industries with two-sided platforms are organized around physical or virtual platforms that enable distinct groups of agents to interact with one another.
- Under platform incompatibility, an application sold by a developer is valuable only on the platform sold by the platform provider with whom the developer traded.
- While society would be better off if platforms were compatible, the quest for market dominance by competing platform providers prevents them from agreeing to a common standard.