"Game of Platforms: Strategic Expansion into Rival (Online) Territory"

Abstract

Online platforms, such as Google, Facebook, and Amazon, are constantly expanding their activities while increasing the overlap in their service offerings. This paper asks: Is expansion into rival platforms’ services profit-maximizing when users’ platform choices endogenously change with expansion? We model an expansion game between two online platforms, both incumbents in distinct service markets, that provide their services free of charge to users and earn ad-based revenues. Platforms decide whether or not to expand by adding the service already offered by their rival. Expansion is costly and impacts users’ platform choice—namely, their choice of single- vs. multihoming, which, in turn, affects platform prices and profits derived from the advertisers’ side of the market. We demonstrate that, in equilibrium, platforms may choose not to expand. Strategic “no expansion” decisions are due to the quantity and price effects of changes in the user partition resulting from expansion. We further analyze the effects of expansion-driven changes in interplatform compatibility, expansion costs, probability of users’ ad engagement, switching costs, and intraplatform service complementarity and quality on the optimal expansion strategy. We then incorporate these considerations to derive an optimal expansion rule that can be used to guide managerial decision-making regarding expansion into a rival’s “territory.”