Open Versus Closed

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Discussion Papers

Open Versus Closed Platforms

Joacim Tåg Swedish School of Economics and Business Administration, FDPE, HECER and IFN

Discussion Paper No. 209 April 2008 ISSN 1795-0562

HECER – Helsinki Center of Economic Research, P.O. Box 17 (Arkadiankatu 7), FI-00014 University of Helsinki, FINLAND, Tel +358-9-191-28780, Fax +358-9-191-28781, E-mail info-hecer@helsinki.fi, Internet www.hecer.fi

HECER Discussion Paper No. 209

Open Versus Closed Platforms*

Abstract

This paper studies an industry in which rms can choose to provide open or closed platforms. Open platforms, as opposed to closed, are extendable so third-party producers can develop extensions for them. Building on a two-sided market model, I show that rms might prefer to commit to keeping their platforms closed despite the fact that opening the platform is costless and open platforms are more valuable to consumers. The reason is that opening the platform may lead to intensi ed competition for consumers. JEL Classification: D40; D42; D43; L10; L12; L13; L14. Keywords: Platforms; Software; Two-sided markets.

Joacim Tåg Department of Economics Swedish School of Economics and Business Administration PB 147 FI-00101 Helsinki FINLAND Research Institute of Industrial Economics (IFN) P.O. Box 55665 SE-10215 Stockholm SWEDEN E-mail: joacim.tag@hanken.fi

* I am thankful for nancial support from the Finnish Doctoral Programme in Economics. I thank Charlotta Grönqvist, Klaus Kultti, Rune Stenbacka and participants at the FDPE Microeconomics and Industrial Organization Workshop in Helsinki for insightful comments.

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Introduction

Why are some platforms open to third-party development while others are closed? In this paper I take a two-sided market approach and highlight that the choice may involve a trade-off between benefits from an open platform and intensified competition for consumers. Opening the platform is...