Platform Compatibility under Different Market Coverage in a Two-sided Market

Problem definition: As the operational boundaries of two-sided platforms gradually blur, we explore pricing schemes and strategic decisions on platform compatibility. In particular, a dominant platform with awareness and valuation advantages might open an interface for a competitive niche platform, which may choose to set unified or differentiated prices on the compatible channel compared with its exclusive channel. Methodology/results: We develop stylized game models to characterize the co-opetition interaction between the dominant and niche platforms. First, we find that compatibility generally intensifies competition, leading to price reductions. However, under certain conditions, platforms may raise prices on their exclusive channels when compatibility occurs, with the underlying rationale differing between the unified and differentiated pricing schemes. Second, compatibility can be sustained as an equilibrium strategy only when the level of awareness of the niche platform is high and the valuation increment from compatibility with the unified pricing scheme is low. In the differentiated pricing scheme, the niche platform’s pricing power erodes the dominant platform’s profits, making compatibility less viable. Furthermore, by comparing the effects of the two pricing schemes, we find that the differentiated pricing scheme allows for a greater concentration of profits and demand in the compatible channel than the unified pricing scheme does. Finally, compatibility can enhance social welfare when the niche platform’s valuation increment is small. Managerial implications: Our study provides guidelines on the conditions under which platform firms can realize compatibility. We demonstrate that the essence of compatibility lies in the redistribution of surplus between platforms. We also identify the co-opetitive mechanisms between platforms under different pricing schemes, highlighting how these mechanisms evolve depending on whether platforms adopt unified or differentiated pricing. Managers can learn how key features such as awareness and valuation advantages affect platform firms’ compatibility under different pricing schemes.