Vertical differentiation and platform competition in two-sided markets
DOU Yifan1,2, ZHU Yan1
1. Research Center for Contemporary Management, Key Research Institute of Humanities and Social Sciences at Universities, Tsinghua University, Beijing 100084, China;
2. School of Management, Fudan University, Shanghai 200433, China
Abstract：Software platforms such as Apple iOS and Google Android differ from the traditional platforms in terms of their revenue resources from the commission of the third-party software sales. However, the literature has paid little attention to the role of the third-party software providers in the platform competition. This paper employs a stylized game-theoretical model to analyze the platform competition between two vertically-differentiated software platforms in the presence of third-party software providers. The analysis uses both sequential game equilibrium and third-party software provider's profit maximization. The results suggest that: 1) the software market extends the market coverage of inferior platforms, 2) superior platforms may also benefit from quality improvements in inferior platform, and 3) some conditions can result in the inferior platform employing a zero-price strategy.
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