Interoperability Between Ad-Financed Platforms With Endogenous Multi-Homing

Platform interoperability is considered a powerful tool to promote competition in digital markets when network effects are at play. We study the incentives of two competing ad-funded platforms to provide interoperability in a setting where consumers can single-home or multi-home and decide how much time to spend online. When the platforms are symmetric, perfect interoperability emerges in equilibrium and is socially efficient. When a larger platform has an installed base of customers, its incentive to make its services interoperable is lower than for the smaller platform. Interoperability does not emerge in equilibrium if the installed base is sufficiently large. However, mandating interoperability between the asymmetric platforms is not always socially optimal.