Complementary Multi-Sided Platforms

Abstract

Motivated by several examples, including Internet of Things (IoT) patent licensing, we consider a model in which m ≥ 1 complementary platforms choose prices for n > 1 connected devices which generate demand externalities among themselves. We characterize equilibrium prices and show that platforms face a trade-off between an externality internalization effect and a value extraction effect. Given a device, the externality internalization effect (the value extraction effect) represents a weighted sum of all the externalities that a device generates to (receives from) other devices. The weight assigned to each device reflects its position in the network of demand externalities and is measured by the Katz-Bonacich centrality. We show how the centrality measures and resulting pricing decisions change with the number of platforms. Even if Cournot’s insight continues to hold (complementary monopolists charge higher prices than an integrated monopolist), surprisingly, the total prices for some particular devices in a duopoly can be lower than the prices in the single monopoly benchmark. We contribute to the two-sided market literature by analyzing complementary platforms in a general multi-sided market.