Investment Incentives in Two-sided Platforms∗

We study investment incentives in proprietary and open platforms. We find that for a given a level of platform adoption, investment incentives are stronger in proprietary platforms. However, open platforms may receive larger investment because they benefit from user innovation and may lead to wider adoption, which raises the return to investment. Application prices do not affect equilibrium investment and adoption in proprietary platforms. The same is not true for open platforms. In particular, we derive conditions under which an increase in application prices leads to an increase in both, user and developer adoption in open platforms. We also study a mixed duopoly model and examine how the price structure and investment incentives of the proprietary platform are affected by investment in the open platform.