Competing platform owners’ entry and an OEM's cooperation response

Abstract

This paper develops a game-theoretic model that examines the entry decisions of two competing platform owners with differentiated research and development (R&D) efficiency and the response strategy of an original equipment manufacturer (OEM) in selecting which platform to cooperate with. The OEM and platform owners compete on quality and price in the face of consumers with heterogeneous preferences across the dimensions of the device and platform. We analyze the interaction between the entry decisions of platform owners and the OEM's response strategy within two cooperation models. In the charging model, we find that in the absence of entry, the OEM prefers the high-efficiency platform. When only one platform owner enters, the OEM prefers the low-efficiency platform. If the differentiated R&D efficiency and the device differentiation cost are large, both platform owners will choose to enter and the OEM will cooperate with the low-efficiency platform. In the bundling model, when only one platform owner enters, only at a large cost of device differentiation will the OEM cooperate with the platform that enters the market to weaken market competition. In particular, when only the high-efficiency platform enters, it is interesting that there exists a large cost of device differentiation that makes the high-efficiency platform more favorable in the case when the OEM cooperates with the low-efficiency platform. Our study provides practical insights into platform entry and OEM response.