Multihoming vs. Single-Homing Software: Compatibility or Competition?

Compatibility or competition is a key strategic decision for multihoming software developers. Compatibility is a strategy by which companies set up their software to be more compatible with their competitors’ products, while competition is an opposite strategy by which the companies set up their software without any compatibility. We study the strategic decision of a multihoming software company that competes with two firms on different operating systems, (such as Windows and Mac). By formalizing a game-theoretic model to capture the motivation of a multihoming software developer, we find that the compatibility strategy is mainly incentivized by the trade-off between the spillover effect and the compatibility cost. We then solve for reasonable software prices and compatibility level given the market potential from the software firms’ perspective. Several managerial guidelines are obtained to determine the optimal decision in the software development economy. Interestingly, when both the spillover effect and the compatibility cost are low enough, the multihoming software firm still chooses the competing strategy. Finally, by reporting the numerical analysis, we verify the effectiveness of the theoretical results derived in our model.