- 01 Jun 2015
- Working Paper Summaries
Frenemies in Platform Markets: The Case of Apple’s iPad vs. Amazon’s Kindle
Overview — Frenemies are friends who are sometimes enemies. Among e-readers, Apple's iPad and Amazon's Kindle are frenemies in platform markets because they compete aggressively against each other yet cooperate to a certain extent. The model in this paper explains the incentives for two platforms to become frenemies when the difference in their foci for profits is sufficiently large. That competing platforms with different profit foci may have incentives to cooperate also applies in other settings such as the tablet market or e-commerce.
We study the compatibility decisions of two competing platforms that generate profits through both hardware sales and royalties from content sales. We consider a game-theoretic model in which the platform hardware may offer different standalone utilities to users who have different preferences over the two platforms. We find that incentives to establish one-way compatibility-the platform with smaller standalone value allows users of the competing platform to access its content-can arise from the difference in their profit foci. As the difference in the standalone utilities increases, royalties from content sales become less important to the platform with greater standalone value but becomes more important for the other platform. Compatibility increases asymmetry between the platforms' profit foci and, when the difference in the standalone utilities is sufficiently large, yields greater profits for both platforms. We further show that social welfare is greater under one-way compatibility than under incompatibility, and there exist no incentives for either platform to establish one-way compatibility the other way round. We investigate as well how factors such as different platform production costs, exclusive content, and endogenized royalty rates affect compatibility incentives.