Focality advantage in platform competition

• Author: Yaron Yehezkel,Hanna Halaburda
• DOI: http://doi.org/10.1111/jems.12308
• Published date: 01 January 2019
• Date: 01 January 2019

Received: 21 August 2018

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Accepted: 21 August 2018

DOI: 10.1111/jems.12308

Focality advantage in platform competition

Hanna Halaburda

1

*

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Yaron Yehezkel

2

1

Currency Department, Bank of Canada

and IOMS Department, NYU Stern School

of Business, New York

2

Coller School of Management, Tel Aviv

University, Tel Aviv, Israel

Correspondence

Hanna Halaburda, Currency Department,

Bank of Canada and IOMS Department,

NYU Stern School of Business, NY.

Email: hhalaburda@gmail.com

Abstract

We consider a methodology for studying how beliefs shape platform

competition based on the notion of a partial focality. The concept of focality

is useful for modeling platform competition when the presence of network

effects results in multiple equilibria for a certain set of prices. We illustrate how

to implement this methodology in both static and dynamic competition between

platforms that differ in their basic quality. The initial degree of focality affects

the ability of the high‐quality platform to win the market. Yet, dynamic

considerations may have a positive or negative effect on this ability.

KEYWORDS

coordination game, focality, network effects, platform competition

JEL CLASSIFICATION

D8, K21, L41, L42

1

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INTRODUCTION

In platform competition, agents want to join the same platform that other agents are joining to interact with each other

and benefit from network effects. Therefore, when choosing a platform, agents need to form beliefs regarding the

participation decision of other agents.

A platform can gain a competitive advantage if consumers expect it to attract other consumers. We refer to such a

platform as a “focal”platform. A “non‐focal”platform may face a “chicken‐and‐egg”problem, as consumers may be

reluctant to join it simply because they expect that other consumers will not join it.

An example of such a challenge is Microsoft’s difficulty in promoting its Windows Phone operating system (Vincent,

2017). Application developers were reluctant to develop apps because they were skeptical about whether Microsoft

could attract consumers away from Google and Apple. The consumers were reluctant to adopt a platform that did not

offer as many apps as the others (Ovide & Sherr, 2012). The same dynamics made it difficult for Blackberry to promote

its BB10 operating system (Sawers, 2016). At the same time, Apple was very successful in launching its successive

models of the iPhone but was facing a chicken‐and‐egg problem in the market for electronic wallets, where merchants

did not expect consumers to use the service, while consumers did not expect merchants to adopt it (Wakabayashi &

Bensinger, 2014).

The success of Apple’s iPhones shows the other side of this dynamics. Apple got a large number of pre‐orders for

iPhones 5, 6, and 7 (Faughnder & Satariano, 2012; King, 2016; Tibken & Rubin, 2014). Thus, the users were buying the

new —and expensive —phones, even though there were no new applications and the existing applications could not

yet support the features of the new phones. In each new generation, the phone was equipped with attractive new

features independent of the available apps. It is unlikely, however, that these improvements by themselves justify the

J Econ Manage Strat. 2019;28:49–59. wileyonlinelibrary.com/journal/jems © 2019 Wiley Periodicals, Inc.

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*We thank Ido Eisdorfer and Ohad Atad for helpful comments. The views expressed here are those of the authors and do not represent the position of

the Bank of Canada.

ORIGINAL ARTICLE