Network interoperability and platform competition

Résumé

We develop a framework to study how interoperability between competing platforms shapes equilibrium prices and welfare. Our analysis considers two dimensions: interoperability strength—the extent to which network benefits spill over across platform users—and interoperability configuration—whether benefits are shared industry-wide, within coalitions, or through hub-and-spoke networks. We characterize pricing equilibria under different configurations and show that, contrary to conventional wisdom, interoperability can intensify competition: a price cut by one platform may raise demand for its coalition partners, prompting all members to lower prices. We then compare prices, consumer surplus, and market shares as interoperability strength and configuration vary. Our findings highlight that the impact of interoperability depends critically on its form, with implications for competition policy and welfare.