Applications Barriers to Entry and Exclusive Vertical Contracts in Platform Markets
AbstractOur 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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Bibliographic InfoPaper provided by NET Institute in its series Working Papers with number 07-46.
Length: 38 pages
Date of creation: Nov 2007
Date of revision: Nov 2007
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Web page: http://www.NETinst.org/
antitrust; vertical restrictions; exclusive contracts; platform markets; home video game industry; software and hardware markets; two-sided markets;
Other versions of this item:
- James E. Prieger & Wei‐Min Hu, 2012. "Applications Barrier To Entry And Exclusive Vertical Contracts In Platform Markets," Economic Inquiry, Western Economic Association International, vol. 50(2), pages 435-452, 04.
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
- L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-05 (All new papers)
- NEP-COM-2008-01-05 (Industrial Competition)
- NEP-LAW-2008-01-05 (Law & Economics)
- NEP-MIC-2008-01-05 (Microeconomics)
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