Dynamic Platform Competition in Two-Sided Markets with Cloud Storage

Abstract

Platform providers in two-sided markets compete over time by introducing new generations of their platforms. New generations are often backward compatible through some form of cloud storage so that consumers' content, preferences, apps, software, and games from the previous generation can still be used on the current generation. When platform providers compete over time, consumers that switch platforms are unable to use their previous content. With two-sidedness, the incumbent platform provider is able to use its price to the other side of the market, the price to content providers, to endogenously determine the strength of the consumer carryover utility that its consumers face when considering switching platforms. Thus, two-sidedness with cloud storage results in endogenously determined switching costs. I find that cloud storage is not used to foreclose platform entry but instead is used to soften competition between platform providers. Furthermore, the resulting equilibria comport with anecdotal evidence of attempted entry across several platform industries, such as smartphones, video game consoles, personal computers, eReaders, and online streaming subscriptions.