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IESE Research Papers,
IESE Business School

No D/798: Platform competition, compatibility, and social efficiency

Ramon Casadesus-Masanell () and Francisco Ruiz-Aliseda
Additional contact information
Ramon Casadesus-Masanell: Harvard Business Scholl, Postal: IESE Business School. Research Division, Av Pearson 21, 08034 Barcelona, SPAIN
Francisco Ruiz-Aliseda: Universitat Pompeu Fabra, Postal: IESE Business School. Research Division, Av Pearson 21, 08034 Barcelona, SPAIN

Abstract: Katz and Shapiro (1985) study systems compatibility in settings with one-sided platforms and direct network externalities. We consider systems compatibility in settings with two-sided platforms and indirect network externalities to develop an explanation why markets with two-sided platforms are often characterized by incompatibility with one dominant player who may subsidize access to one side of the market. We find that incompatibility gives rise to asymmetric equilibria with a dominant platform that earns more than under compatibility. We also find that incompatibility generates larger total welfare than compatibility when horizontal differences between platforms are small.

Keywords: network; industries; platforms; markets

54 pages, June 17, 2009

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