Platform competition: a game theoretic review. Salazar and Lee (2104)
One of the more important forces shaping the Digital Economy is the emergence of platform-based ecosystems. Commercial forecasts predict that there will be over 50 billion connected electronic devices, enabled by digital platforms by 2020. Companies developing new value propositions based on platform principles have become increasingly attractive to venture capitalist firms. Multi-billion dollar companies such as Amazon and Microsoft have all adopted platform principles as part of their competitive strategies. Understanding and promoting platforms is a major research priority outlined by the Research Council UK’s Digital Economy Programme, which is aligned within the “value creation and value capture” thematic area.
Platform ecosystems are made of customers and partners complementing the offer of the core platform working in a collaborative arrangement that is actively shaped by the platform owner but that promotes value co-creation and sharing. Other examples of platform ecosystems are Intel, ARM, Apple, Salesforce, eBay, Facebook and Google that license their platform technologies to independent software and hardware vendors and enable exchange between multiple parties in markets often displaying network effects.
Platform businesses differ significantly from non-platform counterparts in terms of their economic rational and strategic behaviour. This report reviews the economic game-theoretic analysis applied to industry and multi-sided platforms. Industry platforms are innovation ecosystem organised around a core technology with a modular architecture. Multi-sided market platforms facilitate exchange between multiple type of users usually exhibiting network effects. In platform competition, network externalities are a key factor for success. Basically, the more customers are attracted to the platform, the more valuable the platform becomes to sellers and developers of complementary products.
As an introduction here, Game Theory is a mathematical tool for formally analysing competition and cooperation between firms as they create value and position themselves to appropriate value. Contemporary game-theoretic scholars are challenging our understanding of what are the necessary and sufficient conditions for successfully competing in multi-sided market platforms and industry platforms.
The functioning of platforms is still very poorly understood. This is partly due to piecemeal research approaches which have led to a fragmented understanding. Game-theorists model strategic phenomena by simplifying a reduced set of economic variables, which although ensures mathematical testability, limits practical utility. This report synthesises a sample of 150 journal and working papers and suggests a new analytical framework to analyse platform competition
What is really important to highlight here is that our received wisdom on rational competitive behaviour is proving to be counter-intuitive when trying to understand platform competition. This report synthesises and illustrates the most relevant issues that are being raised by scholars studying platforms. This reports not only reviews firm strategies and structural conditions, but also contrast existing findings against received economic wisdom and identify important areas for further research. The review is supplemented with case studies to help illustrate some of the practical business issues.