Dynamic Platform Competition with Malicious Users

Abstract

Many software products and information technology services are mediated by platforms. Often these platforms feature the simultaneous occurrence of both positive and negative network externalities, e.g., the most popular operating systems are the most attractive platforms for both application developers and hackers alike. In this context, consumers experience a negative network externality in the form of an increased probability of cyber attack (which the platform developer can mitigate by promptly issuing patches, a costly activity) and a positive network externality stemming from increased variety of compatible applications. In this paper, we analyze the interplay between market structure and the provision of quality (in the form of security) by platform developers. The analysis of a differential game model of duopolistic competition by platform developers indicates that the long-run market structure is dependent on the degree to which hackers react to market share asymmetries. When the dominant platform attracts almost the entire hacking activity, the industry evolves toward a less-concentrated market structure even though the net network effect is positive. Conversely, when hacking activity is less sensitive to market share asymmetries, the equilibrium long-run market structure is asymmetric. The degree of asymmetry in long-run equilibrium market shares is decreasing with the increasing hacker sensitivity to market dominance.