Open vs. closed Apple music distribution platform

Abstract

In this thesis, based on the example case study of the Apple iTunes-iPods platform technology, two simple models are analyzed to gain a better understanding of open vs. closed business models as management and market strategies for multi-sided platforms. First, a simple model of a firm with a two-sided platform serving two distinct types of customers is evaluated, assuming network effects as the only intrinsic benefits to joining such a platform. Three different cases of market structure are investigated: (i) monopoly, (ii) open duopoly (iii) closed duopoly. Using game theory, comparative results of prices, profits, consumer surplus and social welfare among the three regimes are presented. The second model focuses on the effects of competition and compatibility between a profit-maximizing closed platform and an open, freely accessible platform. Given certain conditions, it is shown that compatibility can in fact be a profitable strategy for closed platforms while improving social welfare at the same time.