Digital Platform Strategies: Strategic Trade-Offs in Multi-Sided Markets

Abstract

Research on digital platforms has proliferated in recent years. While some studies have started to analyze the strategies of digital platform firms, we still have an incomplete understanding of the strategic trade-offs digital platforms face. Part of the reason is that conventional strategic trade-offs such as cost vs. quality leadership, first mover vs. follower advantage, and make vs. buy decisions are often inapplicable to platform providers because complementors typically control the majority of platform services (including their quality and cost), network effects punish late entry, and the market-hierarchy duopoly does not exist for firms that create their own markets. In response to these paradigmatic shifts, we introduce a conceptual framework based on the idea that digital platforms face a fundamental trade-off between diffusion and differentiation. We then translate this idea to the multi-sided context of digital platforms and discuss the implications of the diffusion-differentiation trade-off for a platform’s supply, demand, and rival sides. We also elaborate on two factors that influence platforms’ positioning regarding this trade-off: resource availability and timing of market entry. Our paper contributes to the emerging scholarship on digital platforms by introducing a multi-sided generic strategy framework and typology for the analysis of platform firms’ strategic positioning.