Academic journal article Journal of Electronic Commerce Research

Platform Licensing for Electronic Commerce Ecosystems

Academic journal article Journal of Electronic Commerce Research

Platform Licensing for Electronic Commerce Ecosystems

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1.Introduction

The internet with its scalability and simplicity has created many e-commerce ecosystems that are powered by complementary effects. In such ecosystems, we usually observe supporting complementary products/services evolving with a central platform / technology standard. "A platform is a system with well-defined access points and rules on which other parties can build applications or service [Iansiti & Levien 2004]." In the m-commerce area, mobile technology is an excellent example of a platform ecosystem where apps as complements are developed for iOS, Android, or Windows operating system platforms. As different operating systems / platforms are not compatible to each other, the installed base, i.e., the number of active devices on each platform, determines the profitability of corresponding mobile apps. On the other hand, the variety and availability of apps for each platform have direct impacts on the demand for the platform products, i.e., smart devices.

In mobile payment area of e-commerce, the Apple Pay ecosystem has gained market shares quickly. The NFC based Apple mobile payment system with the addition of two-factor authentication is the platform technology in the ecosystem. The banks carry the load of the transaction service. The payment service provided by the banks and Apple Pay enabled smart devices are complementary to each other. The more devices with activated Apple Pay, the more transaction service financial institutions will be willing to make available. If Apple Pay service is accepted everywhere, more customers will be willing to buy an Apple device and activate Apply Pay.

In both examples, an increase in availability of one product or service enhances the sales of a complementary product or service, which can in turn increase the value of the original. A platform product in an ecosystem is usually considered more of a durable product/service than the complementary good. For example, smart phones are considered durable platform products because most customers purchase only one unit over certain period, while the apps and mobile payment services are considered non-durable complementary products because customers usually own multiple apps and use the payment services frequently in daily life.

It is well known that when such complementarities exist between the products of independent firms, both firms have an incentive to under-produce because they ignore the positive effects of their own outputs upon the profits of the other firm. Complementarities create a sort of prisoners' dilemma in which both firms would benefit if they increased their outputs, but neither firm has an incentive to unilaterally increase its own production level. We propose that in an e-commerce ecosystem, a platform product manufacturer that has patent protection for its technology may use an appropriately designed licensing arrangement to provide a credible commitment to a higher level of output, thereby encouraging greater output of the complement from its ecosystem partners. When complementary effects are sufficiently strong, a well-designed licensing arrangement can allow the ecosystem to generate more platform and complementary products and make more profits. Note that when complementary effects are absent, a platform durable good manufacturer in the ecosystem has no incentive to license to other firms which have the same marginal costs as (or higher than) itself. This paper contributes to the body of knowledge by establishing the role of licensing arrangements as an ecosystem coordination mechanism when complementary effects are present.

Licensing is a common practice in e-commerce ecosystems that feature complementary interaction between the platform durable goods and complements. For example, Apple Inc., as the platform technology provider of Apple Pay, has entered loyalty licensing agreements with major banks and credit card providers. …

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