Vertical Competition on a Common Platform

We consider a platform whose infrastructure constitutes common attributes for vertically differentiated products in a digital goods market. We examine how vendors craft individual attributes of their products and how the platform decides on the provision and pricing of its infrastructure when facing vendors’ strategic reactions. First, we find that when the platform offers more powerful infrastructure, the high-quality vendor improves individual attributes, whereas its low-quality rival reduces individual attributes, exhibiting a pattern of divergence. On the other hand, when the platform charges a higher commission rate for using its infrastructure, both vendors slash individual attributes, with the high-quality vendor slashing more. Second, we find that when vendors’ development cost declines but remains high, the platform improves infrastructure and reduces the commission rate. But when vendors’ development cost is already low and keeps declining, the platform scales back in infrastructure but still reduces the commission rate. Finally, we show the strategic response of the platform, when coupled with vendors’ improved product development efficiency, further boosts the platform’s profit, both vendors’ profits, and consumer surplus, leading to a win-win-win outcome.

History: Anthony Dukes served as the senior editor.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/mksc.2022.0402.