Creating Platforms by Hosting Rivals

Abstract

We explore conditions under which a multiproduct firm can profitably turn itself into a platform by “hosting rivals,” that is, by inviting rivals to sell products or services on top of its core product. Hosting eliminates the additional shopping costs to consumers of buying a specialist rival’s competing version of the multiproduct firm’s noncore product. On the one hand, this makes it easier for the rival to compete on the noncore product. On the other hand, hosting turns the rival from a pure competitor into a complementor: the value added by its product now helps raise consumer demand for the multiproduct firm’s core product. As a result, hosting can be both unilaterally profitable for the multiproduct firm and jointly profitable for both firms. This paper was accepted by Joshua Gans, business strategy.