Licensing vs. platform business model: quality investment and competition

We attempt to provide a new approach based on a Hotelling model to analyse the competition between licensing business model and platform business model in the context of software industry. Specifically, we want to study when the platform business model is feasible? Will the market be monopolised by a pure business model, or rather in a steady-state equilibrium? What will the market structure be? What is the effect of competition on quality decisions? We find that the feasibility of the platform business model relies on both software's intrinsic characteristics and external environments. In the duopoly case, if the horizontal differentiation of the two software products is small and the network effect is strong, then each business model has a chance to monopolise the market. Otherwise the two business models coexist. In latter case, the platform model possesses an apparent advantage over the licensing model to dominate the market. Besides, differing from the monopoly case where the licensing software's optimal quality is always higher than the platform's, when the difference is moderate, the licensing software's quality might be better off being inferior to the platform's for the less incentive of quality improvement and the expensive development cost concerns.