Battle of the platforms: unlocking profitability in multi-sided software platform business models

This thesis seeks to develop a deeper understanding of the market characteristics that influence and enhance the profitability of pricing strategies employed by platform owners in multi-sided markets. It will also identify the optimal set of strategies for maximizing profits based on these underlying market characteristics. Along this, the study presents a model that encompasses three key participants in software platform markets: consumers, complementors, and platform owners. Consumers engage with applications offered by complementors to derive utility, paying a price in return. Complementors develop and offer applications on the platform, leveraging the platform’s technology infrastructure. Platform owners provide the platform and collect revenue through variable transaction commission fees or fixed royalties from complementors. The model operates in two stages: platform owners first select pricing strategies, followed by consumers and complementors making participation choices, considering single-homing consumers and multi-homing complementors. The study identifies optimal pricing strategies, particularly favoring variable fees over royalties, in platforms where more than 50% of complementors are participating on. We show that sustainable oligopolies in platform markets depends on the existence of stable second-stage equilibria, where multiple platforms can secure sufficient consumer and complementor participation to cover costs and generate returns. The number and nature of these equilibria influence market outcomes, with scenarios of multiple stable equilibria often favoring monopoly tendencies with one platform holding the majority of the single homing consumers. We further argue that platform owners prefer single second-stage equilibria over constellations with multiple equilibria, and that even central second-stage equilibria are less favorable from a profit maximization perspective under risk neutrality. We provide a map of recommended strategies for incumbents and entrants subject to the general market conditions, with complementor heterogeneity and consumer benefits as the main parameters. Application of the model to the real-world case of mobile phone applications demonstrates some discrepancies to empirical data, which can be overcome by adjusting our parameter set. This example showcases that real world competition on two platforms favors the existence of a single equilibrium on the second-stage game, which differs from literature on one platform cases.