A co‐opetitive game analysis of platform compatibility strategies under add‐on services

Abstract

Large‐scale platforms (LSPs) with valuation and awareness advantages have enabled competing small‐scale platforms (SSPs) to be embedded in their platforms. This compatibility strategy creates a new channel, that is, the compatible channel, through which customers can purchase services from SSPs via the LSPs. Additionally, numerous platforms have been introducing add‐on services to enhance their profitability. In this study, we develop stylized game models to characterize the interaction between an LSP and an SSP and explore their strategic and operational decisions on platform compatibility under add‐on services. Our major research findings are as follows: First, compatibility has opposite impacts on service pricing. That is, at a low proportion of demand through the compatible channel, the two platforms engage in a price war; otherwise, they both raise prices. Second, we identify the conditions for platform compatibility: Compatibility becomes an equilibrium strategy if the proportion of demand through the compatible channel falls within an intermediate range. Third, we find that homogeneous add‐on services stimulate rather than inhibit compatibility due to the different profit foci of two platforms. Finally, we conduct extensions to further verify the robustness of the conclusions. Our results provide important implications to the burgeoning debate on when platforms should implement compatibility to achieve a win–win scenario under a variety of settings.