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Does a Platform Monopolist Want Competition?

  • Andras Niedermayer

We consider a software vendor first selling a monopoly platform and then an application running on this platform. He may face competition by an entrant in the applications market. The platform monopolist can benefit from competition for three reasons. First, his profits from the platform increase. Second, competition serves as a credible commitment to lower prices for applications. Third, higher expected product diversity may lead to higher demand for his application. Results carry over to non-software platforms and, partially, to upstream and downstream firms. The model also explains why Microsoft Office is priced significantly higher than Microsoft's operating system.

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Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp0604.

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Date of creation: Dec 2006
Date of revision:
Handle: RePEc:ube:dpvwib:dp0604
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  1. Nicholas Economides, 1997. "Network Externalities, Complementarities, and Invitations to Enter," Industrial Organization 9701004, EconWPA.
  2. 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.
  3. David S. Evans & Andrei Hagiu & Richard Schmalensee, 2004. "A Survey of the Economic Role of Software Platforms in Computer-Based Industries," CESifo Working Paper Series 1314, CESifo Group Munich.
  4. Nicholas Economides & V. Brian Viard, 2005. "Pricing of Complementary Goods and Network Effects," Working Papers 05-04, NET Institute, revised Nov 2005.
  5. Farrell, Joseph & Gallini, Nancy T., 1986. "Second-sourcing as a Commitment: Monopoly Incentives to Attract Competition," Department of Economics, Working Paper Series qt8zs1p5cc, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  6. Beggs, Alan W, 1994. "Mergers and Malls," Journal of Industrial Economics, Wiley Blackwell, vol. 42(4), pages 419-28, December.
  7. Nocke, Volker & Peitz, Martin & Stahl, Konrad, 2004. "Platform Ownership," CEPR Discussion Papers 4657, C.E.P.R. Discussion Papers.
  8. Mark Armstrong, 2006. "Competition in two‐sided markets," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 668-691, 09.
  9. Geoffrey G. Parker & Marshall W. Van Alstyne, 2000. "Information Complements, Substitutes, and Strategic Product Design," William Davidson Institute Working Papers Series 299, William Davidson Institute at the University of Michigan.
  10. Simon Loertscher & Yves Schneider, 2005. "Switching Costs, Firm Size, and Market Structure," SOI - Working Papers 0508, Socioeconomic Institute - University of Zurich.
  11. Stanley M. Besen & Joseph Farrell, 1994. "Choosing How to Compete: Strategies and Tactics in Standardization," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 117-131, Spring.
  12. Caillaud, Bernard & Jullien, Bruno, 2003. " Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-28, Summer.
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