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

Abstract      

Platforms in two-sided markets compete over time by introducing new generations. New platform generations are often backward compatible through some form of cloud storage. That is, consumers' apps and games bought for the previous generation of the platform can still be used on the current platform. When platforms compete over time, consumers who switch platforms are unable to use their previous content from the other platform. Thus, this backward incompatibility acts as a switching cost on the consumer side of the market. Unlike the usual switching cost models, an incumbent is able to use the second side of the market, its price to content providers, to endogenously determine the extent to which switching costs exist. In this paper, a model of endogenous switching costs is developed and reveals that it is an important feature of dynamic platform competition and entry. The resulting equilibria confirm anecdotal evidence of attempted entries across several platform industries: smartphones, video game consoles, personal computers, and internet radio subscriptions.