Multi-homing, Product Differentiation and Competition

Abstract

This paper analyzes the competition between two horizontally differentiated firms (platforms) whose products have partially overlapping functionalities. If firms make their products compatible with each other, consumers can consume both products and derive utility from the non-overlapping functionalities. We show that the firms will choose less compatibility than socially optimal. In addition, less differentiated products would induce both firms and social welfare maximizer to allow purchasing both. If we extend the model to a two-sided framework, the platform with a higher quality product and the social welfare maximizer would enforce single purchase if the network externality is large enough.