Cross-Product Compatibility, Lock-In, and Market Power: The Case of Smartphones and Laptops
Published in Job Market Paper, 2024
This paper examines how compatibility across standalone technology products anchors consumers to brands. Using a novel experiment, I identify the causal effect of compatibility, showing that willingness to pay for smartphones increases by 9% of the retail price when compatible with laptops. Utilizing these results, I construct a smartphone demand model incorporating compatibility with laptops to evaluate the welfare effects of (i) mandating cross-brand compatibility (“open ecosystems”) and (ii) cross-market mergers. I find that in 2018–2019, closed ecosystems benefit Samsung by locking non-Apple laptop owners into lower-quality Samsung smartphones, while open ecosystems increase Apple’s dominance. However, in 2020–2023, closed ecosystems benefit Apple, as Samsung’s superior smartphones induce Apple laptop owners to switch to Samsung under open ecosystems. Across periods, open ecosystems increase consumer surplus. A counterfactual cross-market merger between Samsung and HP reduces smartphone market concentration but raises Samsung prices, disadvantaging consumers who value compatibility less.
Recommended citation: Lidany, Yuval. "Cross-Product Compatibility, Lock-In, and Market Power: The Case of Smartphones and Laptops." Job Market Paper (2024).
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