Paper Number

2372

Paper Type

Complete

Description

Regulators have emphasized on mandating compatibility between competing platform ecosystems. In this paper, we study the welfare implications of compatibility by building a stylized model that reflects the competitive dynamics of the current mobile ecosystems market. We consider a device funded and an ad-funded platform that compete for attracting developers and consumers. If compatibility is mandated on the developer side in a way that eliminates the cost of developers to multi-home, then mandated compatibility reduces the welfare of both consumers and developers because it introduces strategic complementarities that limit platform competition for developers. As a result, developers are charged higher prices which through network externalities imply that also consumers are worse off. If compatibility is mandated on the consumer side, by allowing consumers to multi-home, then under strong network effects it can be a Pareto improvement and result in a win-win outcome for all market participants.

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Dec 12th, 12:00 AM

Mandated Platform Compatibility: Competition and Welfare effects

Regulators have emphasized on mandating compatibility between competing platform ecosystems. In this paper, we study the welfare implications of compatibility by building a stylized model that reflects the competitive dynamics of the current mobile ecosystems market. We consider a device funded and an ad-funded platform that compete for attracting developers and consumers. If compatibility is mandated on the developer side in a way that eliminates the cost of developers to multi-home, then mandated compatibility reduces the welfare of both consumers and developers because it introduces strategic complementarities that limit platform competition for developers. As a result, developers are charged higher prices which through network externalities imply that also consumers are worse off. If compatibility is mandated on the consumer side, by allowing consumers to multi-home, then under strong network effects it can be a Pareto improvement and result in a win-win outcome for all market participants.

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