Vertical Mergers in Platform Markets

Jerome Pouyet and Trégouët, Thomas
Authors registered in the RePEc Author Service: Thomas Tregouet

No 11703, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze the competitive impact of vertical integration between a platform and a manufacturer when platforms provide operating systems for devices sold by manufacturers to customers, and, customers care about the applications developed for the operating systems. Two-sided network effects between customers and developers create strategic substitutability between manufacturers' prices. When it brings efficiency gains, vertical integration increases consumer surplus, is not profitable when network effects are strong, and, benefits the non-integrated manufacturer. When developers bear a cost to make their applications available on a platform, manufacturers boost the participation of developers by affiliating with the same platform. This creates some market power for the integrated firm and vertical integration then harms consumers, is always profitable, and, leads to foreclosure. Introducing developer fees highlights that not only the level, but also the structure of indirect network effects matter for the competitive analysis.

Keywords: Vertical integration; Two-sided markets; Network effects; Foreclosure (search for similar items in EconPapers)
JEL-codes: D43 L10 L40 (search for similar items in EconPapers)
Date: 2016-12
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic, nep-mkt and nep-net
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Vertical Mergers in Platform Markets (2016)
Working Paper: Vertical Mergers in Platform Markets (2016)
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