Creating the Bottleneck: Vertical Integration in Platform Markets

We study vertical integration between a platform (an operating system and its application store) and one of two competing device manufacturers, when applications port costlessly across systems. In our benchmark, separation leaves the platform with no upstream market power, because each manufacturer can run an equally good system of its own. Integration creates market power over the developer's access to the buyers of the integrated device, and none over the rival manufacturer. How this bottleneck is priced depends on the strength and the asymmetry of network effects: harm to the rival moves with the developer fee and is not sufficient evidence of consumer harm, and the merger can benefit every party absent any efficiency gain. Richer contracts let separation copy the merger's tax on the developer, but only inside part of the region where the merged firm taxes, and never where integration is pro-competitive. Merger-specific efficiency gains, porting costs and pre-existing dominance all give the platform's system an edge, and what integration should be credited with then depends on whether the merger created that edge or merely prices one that was already there.