First-party content decision under competitive hardware/software platforms: Free vs. charge

Abstract

This study develops a game theoretical model with two-competing hardware/software platforms, to examine whether a platform should charge consumers for first-party content, or offer it for free. Four strategies are considered: both platforms charge, both platforms offer the content for free, one platform charges and the other offers the content for free. As the platforms are two-sided, third-party content developers (TDs) can join and provide third-party content to consumers on the platforms. We find that two driving factors, the degree of cross-side network effect (DCNE) and function matching degree of the free version (FMDFV), affect the two platforms’ Nash equilibrium strategies. Unlike the monopolistic platform, who always chooses to charge consumers for first-party content, under a duopoly competition setting either both platforms charge for first-party content, or both platforms offer free first-party content. Interestingly, we find that a prisoner's dilemma arises when DCNE and FMDFV are both small and when the Nash equilibrium strategy is for both platforms to charge for first-party content. In addition, when both platforms charge for first-party content, a win-win outcome can be achieved for the two platforms and the consumers, if DCNE is moderately large and FMDFV is small. Interestingly, we find that it is unnecessary for a platform to charge a profit-making price to consumers or a profit-making access fee to TDs.