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Applications Barriers to Entry and Exclusive Vertical Contracts in Platform Markets

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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://www.netinst.org/Prieger-Hu_07-46.pdf
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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 07-46.

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Length: 38 pages
Date of creation: Nov 2007
Date of revision: Nov 2007
Handle: RePEc:net:wpaper:0746

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Web page: http://www.NETinst.org/

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Keywords: antitrust; vertical restrictions; exclusive contracts; platform markets; home video game industry; software and hardware markets; two-sided markets;

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  1. Jean-Charles Rochet & Jean Tirole, 2003. "Platform Competition in Two-Sided Markets," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 990-1029, 06.
  2. Kleibergen, Frank & Paap, Richard, 2006. "Generalized reduced rank tests using the singular value decomposition," Journal of Econometrics, Elsevier, vol. 133(1), pages 97-126, July.
  3. Ravi Mantena & Ramesh Sankaranarayanan & Siva Viswanathan, 2007. "“Exclusive Licensing in Complementary Network Industries”," Working Papers 07-04, NET Institute, revised Apr 2007.
  4. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
  5. Robin S. Lee, 2013. "Vertical Integration and Exclusivity in Platform and Two-Sided Markets," American Economic Review, American Economic Association, vol. 103(7), pages 2960-3000, December.
  6. John Shea, 1997. "Instrument Relevance in Multivariate Linear Models: A Simple Measure," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 348-352, May.
  7. Chou, Chien-fu & Shy, Oz, 1990. "Network effects without network externalities," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 259-270, June.
  8. Sharon Oster, 1995. "Exclusive Licensing in a Sequence of Innovations," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 2(2), pages 185-198.
  9. Heide, Jan B & Dutta, Shantanu & Bergen, Mark, 1998. "Exclusive Dealing and Business Efficiency: Evidence from Industry Practice," Journal of Law and Economics, University of Chicago Press, vol. 41(2), pages 387-407, October.
  10. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 85-103, March.
  11. Cooper, James C. & Froeb, Luke M. & O'Brien, Dan & Vita, Michael G., 2005. "Vertical antitrust policy as a problem of inference," International Journal of Industrial Organization, Elsevier, vol. 23(7-8), pages 639-664, September.
  12. Jennifer Johns, 2006. "Video games production networks: value capture, power relations and embeddedness," Journal of Economic Geography, Oxford University Press, vol. 6(2), pages 151-180, April.
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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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