Foreclosure, Entry, and Competition in Platform Markets with Cloud Storage

Platform providers in two-sided markets compete over time by introducing new generations of their platform. New platform generations are often backward compatible through some form of cloud storage so that consumers' content,... [ view full abstract ]

Platform providers in two-sided markets compete over time by introducing new generations of their platform. New platform generations are often backward compatible through some form of cloud storage so that consumers' content, preferences, apps, software, and games from the previous generation of the platform can still be used on the current generation. When platform providers compete over time, consumers that switch platforms are unable to use their previous content. This backward compatibility that is strictly within a single platform provider aids incumbents in locking in consumers. With two-sidedness, the incumbent platform provider is able to use its price to the second side of the market, the price to content providers, to endogenously determine the strength of the consumer carryover utility from first period content that its consumers face when considering switching platforms. Thus, two-sidedness results in endogenously determined switching costs. I find that within platform compatibility is rarely used to foreclose platform entry, but is instead used to soften platform competition between the incumbent and the entrant. In addition, the resulting equilibria confirm anecdotal evidence of attempted entry across several platform industries: smartphones, video game consoles, personal computers, eReaders, and online video streaming subscriptions.