Abstract
Platform-hardware business models (e.g., integrating a software technology platform into a hardware device such as a smartphone) have been widely applied in various industries. This study investigates the response of competing original equipment manufacturers (OEMs) when the developer strategically updates the platform quality. Consumers have two-dimensional valuations of the product: one valuation for the device provided by the OEM and another valuation for the platform provided by the developer. The developer offers two types of agreements: acceptance and rejection of preinstallation of core services that profit the developer. OEMs can preinstall the core services and pay nothing to use the platform, or they can pay a wholesale price for the platform and reject the installation of the core services. We propose a game-theoretic model to examine the strategic agreement choices of dominant and weak OEMs when the developer strategically offers an updated platform quality to enhance a weak OEM's competitiveness. We find that the developer benefits from the OEMs’ acceptance only when the exogenous wholesale price for the dominant OEM is low and the cost difference is moderate. Also, when the research and development (R&D) efficiency is high, an increase in the cost difference induces a conversion from acceptance to rejection for the dominant OEM, and an opposite outcome for the weak OEM. One OEM's installation acceptance may enhance or weaken the advantage of the other OEM's acceptance for the consumer surplus, depending on the value of the R&D efficiency. Several extensions are examined to complement the basic model, and implications behind each strategic choice are revealed.
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