Digital platform compatibility strategies in platform co-opetition

Many digital platform firms cooperate and compete with rivals simultaneously by offering complementary products of their digital platform to rivals. We develop a game-theoretic model to investigate four profit-maximizing compatibility strategies of digital platform firms: incompatibility (I), one-way compatibility with the superior/inferior product sold on both platforms (OS/OI), and two-way compatibility (T). We make four main findings. First, a large value difference and medium compatibility cost favor the dominance of the OS strategy. Second, at a high royalty rate and low compatibility cost, the T strategy dominates because of the high royalty revenue and sales revenue. Third, when substitutability among the systems or compatibility cost is high, the I strategy dominates. Finally, compatibility generates market expansion. We further extend the model to incorporate the impacts of asymmetric platform ecosystem advantages, asymmetric compatibility costs, and consumers’ platform dependence on the optimal compatibility strategy.