Platform Competition and Compatibility Decisions: The Case of Apple’s iPad vs. Amazon’s Kindle∗

We study compatibility decisions of competing platforms when they generate profits through both hardware sales and royalties from content sales. We show that when the two platforms provide different values to their users, their major sources of profits may differ—one platform may generate most of its profits from hardware sales, while the other’s profits will result mostly from royalties of content sales. This difference may give rise to incentives to establish one-way compatibility in a competitive setting: both platforms become more profitable when the platform with greater reliance on content sales allows users of the competing platform to access its content. We relate our results to platform decisions in the e-reader market.