Entry of Platforms into Complementary Hardware Access Product Markets

Abstract

Access to a platform's services often requires consumers to use a complementary hardware product or service, e.g., Internet service is needed to access the YouTube platform. Typically, such access products are provided by third-party firms. More recently, however, some major platforms like Google have themselves ventured into providing these access products. For example, Google Fiber provides access to YouTube. In this paper, we examine the effect of a platform's entry into an access product market when the profits from the platform's advertising business depend upon the quality of the access products. We develop a theoretical model to study this context and find that such an entry by the platform (i) can lead the platform to provide a higher quality access product than the third-party firms at a lower price, (ii) may, in contrast to the entry by a third-party firm, lead to higher-quality access product by both the platform as well as the firms, (iii) improves the platform's profits due to increased advertising revenue and/or additional profits from the access product sales, and (iv) increases consumer surplus even though the platform becomes more dominant due to its entry into the access product market. All the results are driven by the positive association between the platform's advertising profits and the quality of access products in the market.