Invisible Engines

David Evans, Andrei Hagiu and Richard Schmalensee analyse software platforms as two-sided markets, applying the economics that Rochet and Tirole had recently formalised. A platform serves two or more distinct groups whose value to each other depends on both being present, and the pricing problem is therefore different from that of an ordinary product: the platform must decide which side to subsidise.

The cases run across the history of computing and adjacent industries. The authors cover mainframe and personal computer operating systems, video game consoles, payment cards, personal digital assistants and mobile phones, digital media players and the software behind them. In each they trace the pricing structure and its consequences. Video game consoles are sold below cost and the money is made on developer royalties. Adobe gave away the reader and charged for the authoring tool. Microsoft's Windows charged the hardware maker rather than the developer, which produced a large third-party software base.

The analytical claims are that platforms compete on the total price level across both sides rather than on either price separately, that the side with more elastic demand and greater cross-side externality should be subsidised, and that platform markets tend toward concentration without necessarily tending toward monopoly, because multi-homing and differentiation persist. The book predates the app store model, the mobile duopoly and the current antitrust arguments, so its policy chapter reads as a period document. The framework it supplies remains the standard one, and the historical cases are unusually well researched.