Cyber(in)security and Interoperability in Digital Services

ABSTRACT

This paper investigates the interplay between interoperability and the incentives to invest in cybersecurity in digital markets. We develop a two‐sided symmetric duopoly model in which cyberattacks create a congestion‐like externality, and interoperability amplifies hackers' incentives to target connected platforms. We show that interoperability affects cybersecurity investment through multiple channels, potentially producing a non‐monotonic relationship: Low interoperability promotes risk‐mitigation efforts, whereas high interoperability may discourage investment due to a public good effect. We then compare private and social incentives to adopt interoperability, identifying potential sources of misalignment. Finally, we extend the baseline model to account for additional factors shaping the desirability of interoperability, including platforms' business models, users' awareness of cyber risk, asymmetries in user bases, and the role of alternative compensation schemes.