Competing Platforms and Third Party Application Developers

Technology firms often decide between being open or closed to third party application development. Building on a two-sided market model with competing platforms, I show that firms might prefer to restrict third party application development despite the fact that allowing it is free and increases the value of the product to consumers. The reason is that restricting third party application development removes network effects and thereby relaxes competition between platforms. From a social welfare perspective, firms sometimes restrict third party application development even though total welfare would be higher if development was possible.