Abstract
We study an overlooked dimension of value creation in platform markets – quality of complements. Producers of high-quality complements contribute to the growth of a platform’s user base, thus creating and expanding a market for complements. Other producers may then free-ride on this investment to sell cheap and lower-quality complements. This free riding may affect negatively the incentives to produce high quality complements, whereas market expansion would affect quality positively. We argue that the positive effects of market – expansion dominate the negative effects of free-riding at early stages of the platform’s life cycle, such that greater competition within the platform system positively affects the quality of complements, while at later stages the opposite is true. Our empirical analysis of the quality of 4,145 new games in the videogame sector between September 1995 and June 2008 offers strong support for this logic.
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