Platform Compatibility in a Two-Sided Market: Pricing Schemes and Coopetition Analysis

Problem definition: As the operational boundaries between two-sided platforms increasingly blur, we examine the strategic implications of pricing schemes on platform compatibility agreement. A dominant platform may offer a compatible interface for a competitive niche platform. In this setting, the niche platform strategically selects between a unified or a differential pricing scheme for the compatible channel relative to its exclusive channel. Methodology/results: We develop stylized game models to examine the coopetition interaction between the dominant and niche platforms. First, we find that compatibility does not always induce price reductions by either platform. Specifically, compatibility can soften competition under unified pricing but intensifies it under differential pricing, where the niche platform charges a lower compatible channel price while increasing its exclusive channel price. Second, compatibility can be sustained as an equilibrium under unified pricing only when the niche platform’s awareness is high and the compatibility-induced convenience gain is limited. In contrast, under the differential pricing scheme, compatibility becomes unstable as adverse profit redistribution erodes the dominant platform’s incentive to participate. Third, when comparing the effects of the two pricing schemes, we find that differential pricing provides the niche platform with greater leverage and shifts profits toward the compatible channel, whereas unified pricing mitigates competition and preserves a balanced channel structure. Finally, compatibility affects stakeholder welfare differently, redistributing benefits across consumers, providers, and platforms. Managerial implications: Our study provides guidance on the conditions under which platform firms profitably pursue compatibility. The strategic essence of compatibility decisions lies in the redistribution of surplus, which shapes the participation incentives of platforms. Managers are advised to calibrate compatibility agreements based on relative awareness advantages and the convenience gains associated with the compatible channel.

Funding: This work was supported by National Natural Science Foundation of China [Grant 72402076]; Humanities and Social Sciences Research Project of the Ministry of Education of China [Grant 24YJC630123]; Shandong Provincial Natural Science Foundation of China for Young Scholars [Grant ZR2024QG123]; Taishan Scholar Project of Shandong Province of China [Grant tsqn202408212]; National Science and Technology Council [Grant NSTC 113-2410-H-005-038-MY3]; Hong Kong RGC [Grant C6020-21GF]; and Crown Worldwide Professorship of Business.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2024.0805.