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Competition and value capture in platform markets: Implications for complementor strategy

Competition and value capture in platform markets: Implications for complementor strategy, joint with Johannes Loh.

Working paper.

We study how competition between platforms relates to the strategic choices of their complementors. In particular, we are interested in how an increase in competition due to the entry of a new player affects the cooperative value co-creation efforts of complementors on the incumbent platform. Drawing on value capture theory, we argue that this has ambiguous implications for their incentives to continue to cooperate. On the one hand, the entry threatens complementors’ value creation and capture on the incumbent — a demand-side effect that increases cooperation to protect their profitability on the incumbent. On the other hand, the entrant may constitute an attractive alternative, leading to misaligned value capture expectations on the incumbent — an outside-option effect that decreases their cooperation. We test predictions from a simple theoretical model in the context of the PC video game distribution market: Here, the dominant incumbent Steam faced competition with the launch of the Epic Games Store. We study two types of (non-)cooperative strategic choices of game developers on Steam: Multihoming by joining the rival, and their tendency to participate in Steam sales — the platform’s most salient ecosystem orchestration efforts. Our empirical analysis provides broad support for our theoretical predictions: Complementors who are subject to a detrimental demand-side effect increased their cooperation with the incumbent, and those subject to an outside-option effect decreased their cooperation.