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Applications Barrier To Entry And Exclusive Vertical Contracts In Platform Markets

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  • JAMES E. PRIEGER
  • WEI‐MIN HU

Abstract

Our study extends the empirical literature on whether vertical restraints are anticompetitive. We focus on exclusive contracting in platform markets, which feature indirect network effects and thus are susceptible to applications barriers to entry. Theory suggests that exclusive contracts in vertical relationships between the platform provider and software supplier can heighten the entry barriers. We test these theories in the home video game market. We measure the impact on hardware demand of the indirect network effects from software. We find that although network effects are present, the marginal exclusive game contributes virtually nothing to console demand. Thus, allowing exclusive vertical contracts in platform markets need not lead to a market structure dominated by one system protected by a hedge of complementary software. Our investigation suggests that bargaining power enjoyed by the best software providers and the skewed distribution of game revenue prevents the foreclosure of rivals through exclusive contracting.

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File URL: http://hdl.handle.net/10.1111/j.1465-7295.2010.00355.x
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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 50 (2012)
Issue (Month): 2 (04)
Pages: 435-452

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Handle: RePEc:bla:ecinqu:v:50:y:2012:i:2:p:435-452

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Cited by:
  1. Jin-Hyuk Kim & Jeffrey T. Prince & Calvin Qiu, 2013. "Indirect Network Effects and the Quality Dimension: A Look at the Gaming Industry," Working Papers 2013-10, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.

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