Vertical Control Change and Platform Organization under Network Externalities

Jorge Padilla, Salvatore Piccolo and Shiva Shekhar

No 9901, CESifo Working Paper Series from CESifo

Abstract: In this paper, we examine how the introduction of network externalities impact an open and vertically integrated platform’s post-merger contractual relationship with third-party sellers distributing through its marketplace. Regardless of whether the platform uses linear contracts or two-part tariffs, we find that, provided these contracts are public, the platform has no incentive to exclude its non-integrated rivals and that the latter’s market share rises as network effects gain importance. Vertical integration serves as a commitment device that open platforms can use to convince potential users (e.g., consumers and developers) that their ecosystem will be large and compelling. Interestingly, when the open platform competes with a closed rival, i.e., with a fully integrated ecosystem, it may find it profitable to subsidize independent third-party sellers to strategically steer demand away from the competing ecosystem. These results have novel managerial implications on the incentives of a platform to open up its ecosystem to third-party sellers, as well as for the regulation of vertical integration in the presence of network effect and when different platforms operate alternative business models.

Keywords: open ecosystems; network externalities; platforms; vertical integration (search for similar items in EconPapers)
JEL-codes: L22 L41 L51 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic, nep-pay and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9901

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