Foreclosure Incentives with Network Effects: A Framework for Screening Digital Mergers

Johannes Johnen and Shiva Shekhar
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Johannes Johnen: Université catholique de Louvain, LIDAM/CORE, Belgium

No 2025015, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper proposes a simple yet useful framework for evaluating vertical mergers in digital markets by distinguishing between product-specific and ecosystem-specific network effects. Vis-a-vis no network effects, product-specific network effects amplify foreclosure and steering incentives, as a rival’s growth directly undermines the platform’s product value. Conversely, ecosystem-specific effects dampen foreclosure incentives, since rivals contribute to the overall value of the platform ecosystem. We develop a formal model illustrating how this distinction shapes platform behavior and competitive outcomes. We apply this distinction to real-world examples to illustrate its potential usefulness. Our distinction implies that regulators may want to adopt a stricter standard with no presumption of efficiencies where product-specific effects dominate. In contrast, when ecosystem-specific effects prevail, merger evaluation should mirror traditional vertical merger analysis. Thus, offering a more nuanced approach to merger evaluation by presenting a practical screening tool to identify problematic vertical mergers in markets featuring network effects.

Keywords: Network Externalities; Platforms; Vertical Integration (search for similar items in EconPapers)
JEL-codes: L22 L41 L51 (search for similar items in EconPapers)
Pages: 22
Date: 2025-07-30
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