Platform Integration and Demand Spillovers in Complementary Markets: Evidence from Facebook's Integration of Instagram

Social media platform owners often choose to provide tighter integration with their own complementary applications (i.e., first-party applications) as compared to that with other complementary third-party applications. We study the impact of such integration on consumer demand for first-party applications and competing third-party applications by exploring Facebook's integration of Instagram, an application in its photo-sharing application ecosystem. We find that consumers obtain additional value from Instagram after its integration with Facebook, leading to a large increase in the use of Instagram for Facebook photo sharing. Further, we find that the growth of Instagram's user base has a positive spillover effect on big third-party applications and a negative spillover effect on small third-party applications in Facebook's photo-sharing ecosystem. As a result, while small third-party applications face reduced demand after integration, big third-party applications experience a small increase in demand. Thus, the overall demand for the entire photo-sharing application ecosystem actually increases, which suggests that Facebook's integration strategy benefits the complementary market overall. Our results highlight the role of platform integration for first-party applications and the application ecosystem overall, and they have implications for strategic management of first-party applications in the presence of third-party applications.