This paper considers the effect of compatibility decisions on consumers and welfare in a setting where the platforms are asymmetric and consumers have to decide both which platform to join and which applications to buy that run on these platforms. The paper shows that imposing a higher degree of application compatibility, when applications are close substitutes, may lower social welfare. Application compatibility is compared with platform compatibility and the results indicate that the two types of compatibility have opposite implications for how firms and consumers are affected by compatibility. Finally, it is shown that a policy of application compatibility that increases static efficiency can have adverse effects on dynamic efficiency.
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