Explaining Platform Value: Membership, Usage and Competition Effects

The value of a two-sided platform to users depends critically on the variety of complementary products available for it, and on their quality. The platform owner chooses the royalties (usage) and the access (membership) fees for the developers of complementary products, and the price of the hardware for the users. Yet the quality and price of complementary products are controlled strategically by the third-party developers. The platform’s and the developers’choices reflect the relative strength of the membership effects (how the users are attracted by the number of developers and complements) and usage effects (how the users are attracted by the quality of the available complements). We model the strategic interaction between the platform owner and its developers, and among developers that compete for the users, deriving endogenously the platform’s pricing strategy and the price and quality of complementary products. Although the price of complementary products decreases with the number of developers, the quality can increase or decrease depending on the relative strength of membership and usage effects. The combination of these two effects also affects the platform’s choice to subsidize only one side (the users) or both sides of the market. These results hinge on the developers’competition for users within the platform, but they resonate with previous findings that pertain to competition across platforms. 1Corresponding author: [email protected]