7. Platform rules: multi-sided platforms as regulators Kevin J. Boudreau and Andrei Hagiu1 INTRODUCTION In 1983, the videogame market in the USA collapsed, leading to bankruptcy for more than 90 percent of game developers, as well as Atari, manufacturer of the dominant game console at the time. The main reason was a ‘lemons’ market failure: because it had not developed a technology for locking out unauthorized games, Atari was unable to prevent the entry of opportunistic developers, who flooded the market with poor-quality games. At a time when consumers had few ways to distinguish good from bad games, bad games drove out good ones. The videogame market was resurrected six years later only when Nintendo entered with a set of draconian policies to regulate third-party developers more tightly. Central to Nintendo’s strategy was the use of a security chip designed to lock out any game not directly approved by Nintendo. Twenty-five years later, in the summer of 2008, Apple launched the iPhone store (a digital store of third-party applications for its immensely popular iPhone) at a time when lemons problems had become less of an issue, with widely available reviews and ratings available on the Internet. Even so, Apple reserved the right to verify and exclude any third-party application it did not deem appropriate. And it exerted that right swiftly by taking down an application named ‘I Am Rich’, which cost $999 (the maximum price allowed by Apple), while doing nothing more than presenting a glowing ruby on the buyer’s...
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