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Vertical Mergers in Platform Markets

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  • Pouyet, Jérôme
  • Trégouët, Thomas

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.

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  • Pouyet, Jérôme & Trégouët, Thomas, 2016. "Vertical Mergers in Platform Markets," CEPR Discussion Papers 11703, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11703
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    Cited by:

    1. Quitz'e Valenzuela-Stookey, 2020. "Platform-Mediated Competition," Papers 2011.03879, arXiv.org.
    2. Kim Soo Jin, 2020. "Direct Interconnection and Investment Incentives for Content Quality," Review of Network Economics, De Gruyter, vol. 18(3), pages 169-204, September.
    3. Pouyet, Jérôme & Trégouët, Thomas, 2016. "Vertical Mergers in Platform Markets," CEPR Discussion Papers 11703, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Vertical integration; Two-sided markets; Network effects; Foreclosure;
    All these keywords.

    JEL classification:

    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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