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Applications Barrier To Entry And Exclusive Vertical Contracts In Platform Markets

  • JAMES E. PRIEGER
  • WEI‐MIN HU

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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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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  1. Matthew T. Clements & Hiroshi Ohashi, 2004. "Indirect Network Effects and the Product Cycle: Video Games in the U.S., 1994-2002," Working Papers 04-01, NET Institute, revised Oct 2004.
  2. 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.
  3. 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.
  4. Richard Paap & Frank Kleibergen, 2004. "Generalized Reduced Rank Tests using the Singular Value Decomposition," Econometric Society 2004 Australasian Meetings 195, Econometric Society.
  5. 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.
  6. Harikesh Nair & Pradeep Chintagunta & Jean-Pierre Dubé, 2004. "Empirical Analysis of Indirect Network Effects in the Market for Personal Digital Assistants," Quantitative Marketing and Economics, Springer, vol. 2(1), pages 23-58, 03.
  7. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
  8. 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.
  9. 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.
  10. Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers dp409, Financial Markets Group.
  11. Christiaan Hogendorn & Stephen Ka Yat Yuen, 2009. "PLATFORM COMPETITION WITH 'MUST-HAVE' COMPONENTS -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 57(2), pages 294-318, 06.
  12. 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.
  13. Ravi Mantena & Ramesh Sankaranarayanan & Siva Viswanathan, 2007. "“Exclusive Licensing in Complementary Network Industries”," Working Papers 07-04, NET Institute, revised Apr 2007.
  14. 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.
  15. Chou, Chien-fu & Shy, Oz, 1990. "Network effects without network externalities," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 259-270, June.
  16. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 85-103, March.
  17. James E. Prieger & Wei-Min Hu, 2006. "An Empirical Analysis of Indirect Network Effects in the Home Video Game Market," Working Papers 06-25, NET Institute, revised Oct 2006.
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