Platform Competition, Compatibility and Social Efficiency

I came across this interesting research paper by HBS on platform competition and compatibility.

In summary: Many markets are characterised by 2 sided virtual and/or physical platforms where agents exchange and are charged a fee by the platform provider. The research by HBS scholars shows that profits are higher for providers if their platforms were compatible (such as when they are based on a common standard). Platform compatability generally leads to equilibrium in an oligopolistic market, and obviously benefits society best. Platform incompatibility on the other hand leads to lower profit margins, but allows one market player to gain dominance over others and earn more. The research thus shows that competition is a major factor preventing platform providers in agreeing to a common standard.

Looking at it in terms of pure supply and demand this makes complete sense. Airlines want to be overbooked. Supermarkets may squeeze their suppliers, but cannot afford to lose their customers. I can think of no industry where providers wouldn’t want a higher share of the demand.

In platforms, there is an interesting shift taking place though now with cloudware or Platform-as-a-service (PaaS). Without being an expert on this topic, I believe that the differentiation between users and developers is getting increasingly blurred. What dynamics shape pricing on such platforms? I think these platforms are still based on propreitary technology thus creating lock-ins. Is that still true for Google Apps Engine though? I don’t know, but I would love to hear from others who do.

On a personal note, I am currently involved with a trading platform in reinsurance. And while there is a common standard that all platforms adhere to, I still think that existing platforms are more aligned to one side. There is a definite empathy for one side of the platform user base.  Interestingly, the reasons are many. Not just competition! Trading platforms in this sector are still new. They are not the norm and not (yet) highly competitive. So it will be interesting to see how this develops. Any thoughts welcome.

You can read the research paper over here.