Monday, August 24, 2015

Competition between Vertically Differentiated Platforms

Yusuke Zennyo, Osaka University of Economics addresses Competition between Vertically Differentiated Platforms.

ABSTRACT: This paper investigates the competition between vertically differentiated platforms in two-sided markets. We assume the presence of two competing platforms producing either higher- or lower-quality devices for consumers. Each platform decides the price of its hardware device for consumers and the royalty rate for software developers. We find that, despite the existence of quality differences, the decisions by the platforms about royalty rates are symmetric and only hardware pricing is asymmetric. We also demonstrate that an equilibrium may exist in which a lower-quality platform can enjoy greater profit than a higher-quality rival when there are higher development costs associated with creating software to meet the needs of higher-quality devices.

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