Ecosystem Competition: Platforms, Subsidiary Markets and Multihoming in the Videogames Industry

Emerging licensing regimes that generate revenue from game sales, along with gamers' consideration of video game purchases in their platform adoption decisions, call for a reexamination of traditional models of platform competition. We develop a novel model of competition between ecosystems, defined by platforms and their console-specific subsidiary markets for video games, to incorporate post-adoption factors into platform pricing decisions. Counterintuitively, our results show that access to additional surplus from game sales intensifies competition, forcing platforms to further subsidize the gamer side. In the absence of royalties, publishers' licensing fees remain unaffected even when the subsidiary market is considered; however, these fees increase under royalty transfers, suggesting that monetary considerations dominate in ecosystem competition. When publishers multihome, the role of the subsidiary market becomes more pronounced: gamerside subsidies deepen while platforms impose higher licensing fees. The subsidiary market also induces greater multihoming than predicted by traditional licensing models. Surprisingly, the effect of royalties on platforms becomes non-monotonic, in contrast to scenarios where all publishers singlehome. This leads to a threshold beyond which platforms may no longer prefer multihoming, diverging from conventional models where multihoming is typically advantageous. Overall, our findings highlight that platforms' strategic responses to gamers' post-adoption behavior and royalty-based licensing structures cannot be inferred through simple extensions of existing frameworks.