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Vertical Control Change and Platform Organization under Network Externalities

Author

Listed:
  • Jorge Padilla
  • Salvatore Piccolo
  • Shiva Shekhar

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.

Suggested Citation

  • Jorge Padilla & Salvatore Piccolo & Shiva Shekhar, 2022. "Vertical Control Change and Platform Organization under Network Externalities," CESifo Working Paper Series 9901, CESifo.
  • Handle: RePEc:ces:ceswps:_9901
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    More about this item

    Keywords

    open ecosystems; network externalities; platforms; vertical integration;
    All these keywords.

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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